Radware Ltd (RDWR) 2011 Q3 法說會逐字稿

Good morning. My name is Ginger and I will be your conference operator today. At this time, I would like to welcome everyone to the Radware Limited third-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions).

Thank you. Please note that today's call is being recorded. Mr. Roy Zisapel, President and CEO, you may begin your conference.

Thank you. Good morning everyone and welcome to Radware's third-quarter 2011 earnings conference call.

Joining me today is Meir Moshe, the 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. After my comments we will open the discussion for Q&A.

Good, thank you all 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 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 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. We are very pleased to report an additional quarter of record revenues, operating profit and EPS. Revenues for the third quarter totaled $42.2 million, representing 3% sequential growth and 15% year-over-year growth.

Non-GAAP operating expenses amounted to $27.1 million. Non-GAAP operating margin has improved to 17% for the third quarter, up from 15% in the second quarter and up from 14% in the third quarter of 2010.

The non-GAAP net income for the third quarter 2011 amounted to $7.8 million or $0.34 per share compared to net income of $5.6 million or $0.26 per share for the third 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 exchange-rate expenses in the amount of $200,000 bring the GAAP net profit this quarter to $5.4 million or $0.24 per share compared to a net gain of $3.7 million or $0.17 per share in the third quarter last year. Non-GAAP gross margin remains at 81%.

The headcount for the end of the quarter was 721 employees. The DSOs for the quarter were 39 days compared to 34 days in the third quarter last year.

Since the beginning of the year we have generated cash in an amount of $28 million, including $27 million from operations. (inaudible) cash position, including short-term and long-term deposits and marketable securities, increased this quarter to $207 million, and we have no debt. Shareholders equity amounted to $208 million.

Guidance. We expect record revenues both top and bottom lines for the fourth quarter 2011. We expect revenues to range between $43.5 million to $45 million, 81% gross margin. Operating expenses will range between $27.2 million to $27.7 million, financial income at $800,000, and non-GAAP EPS to range between $0.36 to $0.38.

As you can see, ladies and gentlemen, revenues are up, gross margins is maintained, operating profitability and operating margins increased. We expected higher and better (inaudible) in the next quarter.

Our high-end guidance for the December quarter represents 20% operating margin demonstrate the Company's commitment to increase margins. And now I would like to return the call over to Roy.

Thank you Meir. Our third-quarter results reflect another record quarter for Radware. And as evidenced by the guidance we provided, we expect another record quarter in the fourth quarter.

We are pleased with the progress we're making on the key points of our strategy -- focus on data center application delivery and security; and joining the virtualization in cloud growth driver in the enterprise market and mobile data growth driver in the carrier market; growing our business with our existing customers; and increase our channel network and market footprint. I would like to share with you some of the progress we did in the past quarter on these points.

First, let me start with virtualization and cloud computing data centers. We continue to lead the market with our solution for application delivery virtualization and consolidation. Based on our value strategy that was released a year ago to the market, we have over a 12-month lead over our competitors who are just releasing now their first version for application delivery virtualization.

Our application delivery VADI for the data centers that is based on our [value] solutions enjoys a very large competitive advantage across multiple factors. First, the number of [views] or instances supported in a device. In our case 28 with a maximum of 16 for the competition.

Second, the density of the instances, we can pack 28 virtual application delivery instances already in a 4 gig capacity, while the competition require 80 gig capacity for 16 instances. This results in over 20 times better density, which is paramount for cloud computing and data center consolidation.

Third is the integration to data center orchestrators. With our vDirect BPI we're the first to provide full integration and automation to VMware environment such as vCloud Director, vCenter Orchestrator, as well as (inaudible).

And forth, our ADC VADI allows for resource pooling and (inaudible) operation across all the application delivery instances is unique in the market.

This leadership in application delivery continues to result in excellent competitive wins with key carriers and enterprises across the world. Specifically in the past quarter a large Tier 1 carrier in the US placed over a $1 million order to our [value] solution.

Another great example is Konami, one of the largest gaming companies and sites in the world. Konami has started to deploy our ADC-VX devices and plan to consolidate over the coming years [tens] of load balancers to our application delivery VADI technology, achieving great business agility and tremendous cost savings.

On the security side of our business, we announced the Attack Mitigation System. We are very proud of our achievements in this space. If you go over all the recent attacks that got high publicity, for example, there were some severe attacks on (inaudible) exchanges across the world in the past 90 days. Our Attack Mitigation Solution has proven itself tremendously through detecting and blocking real-time the wave of these attacks.

As we see the hacker community launching attacks that last for several days and constantly change their shape and structure, our patented behavioral technology, coupled with the strength and scale of our Attack Mitigation Solution are proving to be the only solution in the industry that is capable of dealing with these attacks. We are seeing strong growth (inaudible) in both EMEA and Americas for these solutions.

From the channel and markets footprint, we're very pleased to announce our OEM agreements with Juniper. Our jointly developed product is an application delivery blade running as a service start in the Jupiter Annex (inaudible), which is Jupiter's best-selling product.

The combined product is targeting key customer applications such as DNS, IPC4 to IPC6 transition, content delivery networks, multi-carriers, value-added services, voice over IP deployments and cloud computing data centers.

In these environments, the application delivery blade provides very unique capabilities. The key advantages or result of the complete integration of the application delivery blade to the MX router, including the Juniper OSS interfaces.

The application delivery blade allows Juniper customers to simply remove application delivery devices from their network and instead use the integrated blade, resulting in simplified network architecture, faster network performance, and lower space and power consumption.

The CapEx and OpEx savings are dramatic. Furthermore, the ability to manage the application delivery blade is an integral part of Junos to provide further simplicity for operations and save additional costs. Up to four application delivery blades can run in a single Juniper [Annex traffic], providing scalability of up to 48 gig of flow balance and traffic.

Beyond the product leadership, Juniper brings to us a major footprint in these environments, and especially on carriers across the world. In many of these cases, such as content delivery networks, DNS, IPv6 (inaudible) transition, Jennifer is the vendor that was awarded with contract for this infrastructure. This makes this partnership ideal to provide also the application delivery capability for the same application.

Together with Juniper, we are currently training the worldwide sales and support forces, and we are engaging with key customers globally. We're obviously very excited from this partnership and believe we're going to see strong ramp up in revenues in the coming years.

In addition, it will allow us to increase our footprint in the growing fixed and mobile carrier market and enjoy some of the key trends of increased mobile data and the transition to LTE.

To summarize, today we have a leadership position in the market as it relates to our product and solution offerings. We continue to lead the market in application delivery for our future (inaudible) cloud data centers [ending in] (inaudible) configuration.

We're increasing our market footprint, introducing unique solutions through OEM and partnership agreements to address key growth drivers in the industry. And we are growing consistently and we have demonstrated increased efficiency in our business resulting in continuous improvement of our operational results.

Before concluding, I would like to thank our customers and partners for their continued support and trust. I would like to thank the Radware team for all of 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

Hi gentleman, it is Josh in for Mark. I was hoping initially if you could give us the breakdown on carrier and enterprise?

The carrier enterprise it was enterprise 70% and carrier 30% this year.

And last quarter you said you had a little bit of work to do as it relates to the Alteon upgrade cycle. How do you feel as it relates to your progress in that area?

I think we are progressing, but still as we mentioned on the last quarter, it is potentially very big and it could take us definitely several quarters, if not a couple of years to really materialize across.

As I've mentioned also last quarter, the value solution, the diluted to consolidate and visualize multiple application delivery units in the Alteon customer base (inaudible) is a key driver to push this upgrade cycle forward.

Okay. And just as it relates to closures, are you seeing any push-outs or any incremental approvals or challenges that you see in bringing deals to completion?

we have seen some in Q3, but I think overall we are satisfied with the closure rates, and especially the development of the pipeline -- the increase in the pipeline size and the amount of deals and the total revenue that we are now addressing.

okay. And then just looking at the relationship with Juniper, are there any contractual limitations or anything that you are seeing in how that is going to ramp?

Contractual limitations on us with the Juniper relationship?

Yes. I mean, everything signed and ready to go moving forward or anything that could delay it?

Yes, we are ready to move forward. The product is already in general availability status with Juniper. And you can also see that on their site under Radware Services ADC (inaudible). We are ready to grow here. We're now approaching customers together, and obviously training their sales support and channels worldwide.

Okay, thank you and good luck.

Ittai Kidron, Oppenheimer.

Hi, guys. By the way the quality of the line is very, very poor, so it is hard to hear you. Roy, can you talk, you know Juniper, how [much] real important contribution do you expect from this OEM opportunity in 2012? How important a component is it in your business?

I think the Juniper OEM the potential is huge for next year. And you can measure it in multiple ways to try to quantify. You can look at what Juniper used to do in the application delivery business when they had a not so competitive product several years ago. It definitely was in the area of $20 million, $30 million.

You can look on the amount of carriers with Jupiter (inaudible) [throughout there] deployed in. And if you just take some of the applications that I have mentioned, like DNS, like content delivery networks, like IPC6 and IPC4 transition, the build of LTE networks and so on, you can understand the ability to serve hundreds of ADC blades to our carrier is very, very possible.

So we definitely see this as a major opportunity for next year. We still need to [the fullest] customer shipments and revenues coming in, but we're very excited about the opportunity and by the initial customer reaction to this product.

Let me ask you this. Can you talk about the go to market? Are these leads that Juniper needs to generate, and how were you involved in the sales process? What does the pipeline -- you know, what is the game plan? Is there already a game plan laid out in the way you sort of go in and sort of attack those carriers?

Okay, so Juniper is the one selling and supporting the product. It is a complete Juniper OEM product with a Juniper part number. As I have mentioned, it is also fully integrated with the Juniper management system, Juniper -- [all its sales] and so on.

So it will be sold and marketed by the Juniper sales force. In Juniper they have a vision for what they call (inaudible) services. And this application delivery is now becoming one of the services that they offer bundled into their Annex router. And they have a dedicated overlay sales force to promote for the routers services. (multiple speakers). Excuse me?

It sounds like you are completely hands-off. This is all -- they are running everything basically.

They will disclose who is the customer. We have a team supporting them. The product (inaudible) at the backend. We are seeing a lot of activity and a lot of TOCs that are lined up in major carriers.

So we're thinking of (inaudible) also the other routers they are selling that, A., they can identify the opportunities. And B., the fact that it is (inaudible) and almost can be presented to the carriers as a feature to add -- as an add-on to the router makes the sales cycle and the complexity of the sale much more than you seeing a dedicated or separated application delivery unit to the carrier [and] network.

Okay, that makes sense. And moving to your business. Can you talk about VDI, how much of your business was it this quarter?

We are not breaking specifically by application, but VDI is not one of the key drivers that we see now for growth. The more growth we're seeing in virtualization in the data center itself, not necessarily future of desktop, but private cloud projects and next generation data centers being built with virtualization and those types of projects.

And VADI, how big is VADI -- how has VADI tracked this quarter?

Again, we don't break it unless it is over 10% already of all product revenues. I think it was already a couple of quarters that this is the case. We see a lot of traction with VADI. And as I mentioned -- I mentioned two cases of excellent competitive wins. (inaudible) new customers, both carriers and enterprises. We're very satisfied with this traction.

And going to your comments where you feel the time advantage you have over your competitors with this solution. F5 just reported results yesterday. They just talked about the VIPRION 2400 actually strongly exceeding their expectations. So it seems like they are making very good progress on their vCMP architecture, which is similar to yours.

I guess, why do you feel at this point relative to F5 you still have the edge? Do you feel like F5 has managed to close a lot of the technical gap here?

So I think I tried to address that in my comments. (inaudible) I mentioned when you speak about virtualization and consolidation the key factors is how much can you consolidate? So in our case it you can consolidate today in a ratio of 28 to 1. You would need to buy a fully saturated 2400 in order to reach a 16 to one consolidation ratio. So, just here today we have over 60% consolidation ratio.

The second component in consolidation and virtualization is density, meaning, in what type of compounded can you consolidate? And F5, in order to reach 16 instances, as I've mentioned, with the full-blown 2400, you need to buy 80 gig capacity (inaudible). In our case you can reach the 28 instances already with only 4 gig of capacity. So 40 times more (inaudible).

Think about a cloud computing or a hosting data center when there are many, many small customers or even large customers. The typical customer can be 200 meg for their SAP application, maybe 50 meg for their VPI application. If I want to consolidate let's say 20 of these customers to a single device, at the end it will cross a 10 gig total capacity. We offer that. F5, you can pay 8 times, you will buy more platforms. And so it is not a feasible or economic solution for the data center.

The first point is how integrated is the (inaudible) application delivery in fourth-quarter to the data center automation tool. Consolidation in cloud, it is all about business agility. And here again we are the first to integrate with vCloud Director and vCenter Orchestrator. It was also presented on VMware in VMworld. And we feel here that with our vDirector API, again, we have a big advantage in the market.

So we think from a density point of view, from a scalability point of view, from an integration point of view, we are leading at least 12 months. And we believe that in the coming quarters we will be able to announce another layer of our (inaudible) that will push this competitive advantage even further.

All right, good luck guys.

Thank you.

Rohit Chopra, Wedbush Securities.

Hey guys. I have three questions. One, I thought -- could you break out the geographies by US, EMEA and APAC?

Second, I wanted to ask about Juniper one more time. How do you make sure that you don't bump into them in the field? You get 30% of your sales from carriers. I just want to get a sense of how you guys are going to market again. So I know Ittai asked that question, but I just want to see how you know you're not bumping into each other in the field.

And then if you could give us one favor -- I know you're probably not going to breakout what the size of the opportunity it, but can you break out the margin profile of the product that you are actually selling? So could you give us a sense of the gross margin and operating margin on the product?

Okay, so the regions. The US this quarter were 27% from revenues, EMEA 31%, and Asia-Pac 42%.

Okay, regarding your questions with Juniper, actually we're very excited because we think it is complementary to our (inaudible).

First, geography-wise Juniper is driving roughly 60% of the revenues from the US. As Meir Moshe mentioned, we are around 30% of our business. So from a geography point of view, the Juniper carrier business can dramatically increase our footprint and business in the carriers with little overlap.

The second I mentioned is where we are selling. We're very focused on the data centers in our carriers sales. I've mentioned the VADI for data center consolidation, data center virtualization. And we will continue to sell and grow that piece of the carrier business.

The Juniper application delivery blade, based on where the Juniper (inaudible) are deployed, they are deploying mainly in the carrier networks. There are deployments also in the [Terra data] center, but the vast deployment base or [informed base] is in the carrier network next to the caching points of presence, the DNS points of presence, the [VXIP] radios, voice over IP, as I have mentioned IPv6 to IPv4 transition points.

Those are points that our business is very small there. And on the other end, it is very natural to put a blade in an existing router already deployed and supply the services where they may be installed in another F5 device next to the router.

As have I mentioned in my prepared remarks, you can take the ADC devices out. You simply (inaudible) [your natural] architecture. You address devices to the network going forward will run faster. And it is completely integrated so it is easier to manage, easier to deploy, easier to troubleshoot.

All of that translates to major CapEx and OpEx savings across carrier networks, which is one of the main driving forces behind the carrier CapEx purchases. So we feel very comparable on the fact that it is very complementary to where we are deploying the carriers and actually can increase dramatically our footprint in our existing carrier customers, as well as bring us into many new carrier accounts for us.

On the last question you have asked concerning gross margin. We are selling software in this agreement to Juniper that runs on the Juniper blade. As a result, the gross margins are software-based and they are higher than our current 81% gross margin of our business. But from a gross margin perspective, if the agreement is bringing the fruits we are expecting there is an opportunity for gross margin expansion.

And Roy is there a way to just give us a sense of what the operating margin is on something like that? I'm assuming it is much higher also than your current level of operating margin?

You are correct because we are leveraging most of the same R&D investment at the core and just on top some modifications are required for the Juniper form factor. But all of the core product development -- future development is basically already done, and included in our business model.

So can we just assume that there is no sales and marketing associated with it?

There is. There is. But again these sales and marketing investments is just operating as an overlay to the product experts. It is not -- we don't need to cover all of their branches, all their employees with the core group. But it is spread across the geographies, but we don't see it going over 20 people by the end of [2012] -- of next year 2012.

Thanks, Roy. Thank you.

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

Roy, just on data center consolidation, are we starting to see more intra-data center applications for Radware or is it still about winning one data center at a time, one rack at a time? Maybe if you could just talk about how that is expanding that would be helpful.

It depends on the customer actually. Some customers simply because of the size of the task in hand are finishing one data center at a time. And they do not only the application delivery consolidation of the whole project, in some cases they also -- this project is part of a new data center buildout, so they're building the next gen data center and they are moving or consolidating to it in some smaller, older data centers from different parts of the world.

At the other front, especially in the carrier market where they are starting to deploy a public cloud or a private cloud for their customers, then you see projects that are from the initial phase are spending more than one data center. So we're seeing a combination of two today. The majority of projects are still one data center at a time.

One at a time, got it. And then, Roy, conceptually as we step back and look at the Company, the opportunities and the growth rate, the Company is growing near 50% on its topline. Your competitor, who is much larger, is targeting 20% plus topline growth.

As we look towards next year -- and I am not asking for guidance, but more concepts of what might you do to accelerate your topline growth. What will be the biggest component that might drive that acceleration next year, assuming the environment is the same?

Considering that you have a lot of new products and a lot of new partnerships, can we potentially get to a 20% topline growth number next year?

We're not giving specific guidance for next year in this call. But I'm thinking if you look on the past several quarters they were ranging between 17% and 15% in the last one. We believe we have a lot of traction both on the VADI solution for data center consolidation and the Attack Mitigation, and we think we are picking up more steam behind these solutions. So I definitely would expect us to do better in terms of growth in these I mentioned.

And obviously we have announced our first large OEM agreement with Juniper, and we believe that should contribute on top of that, and without cannibalizing any of our current revenues to our growth.

So, if you take together those two factors, you can assume that we are definitely targeting, at least internally, an improved growth rate and also marketshare gains from the competition, F5 and others.

Got it. And, Roy, along those lines is it a matter of additional resources, more salespeople, more selves coverage, will that get you there? Because it seems the opportunity and the market is growing, and perhaps it is scaling the organization, just kind of your thoughts there?

We are planning to add more resources also in sales and marketing, but again in a very disciplined manner. You can see what we've done in the last several years, and we have done the growth in a very profitable manner. We continue to believe we can do that.

We are going to add additional sales and marketing heads for driving more our VADI (inaudible) solutions. And at the same time, I think the OEM business and can be very scalable and profitable from the business model that will allow us even to fund more of our organic growth.

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

Thank you.

(Operator Instructions). At this time, there no further questions in the queue.

Thank you everyone for attending, and have a great day.

Ladies and gentlemen this does conclude today's conference call. Thank you for participating. At this time you may now disconnect.