Radware Ltd (RDWR) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Radware Ltd. 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, today's call is being recorded. I would now like to turn the conference over to your host, Roy Zisapel, President and CEO. Sir, you may begin.

Thank you. Good morning, everyone and welcome to Radware's fourth-quarter 2011 earnings conference call. Joining me today is Meier Moshe, our Chief Financial Officer. Meier will start the call by reviewing the financial results and afterwards, I will discuss the business highlights of the fourth quarter. After my comments, we will open the discussion for Q&A. Meier?

Thank you, Roy and welcome everyone to our fourth-quarter conference call. First, I would like to read you the Safe Harbor language. During the course of this conference call, we make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such statements are just predictions and that actual events or results may differ materially, including, but are not limited to, general business conditions and our ability to address changes in our industry; changes in demand for products; the timing and amount of orders; and other risks detailed from time to time in Radware's filings. We refer you to documents the Company files from time to time with the 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 -- 20% non-GAAP operating margins and non-GAAP EPS of $0.42. Revenues for the fourth quarter totaled to $45.1 million, 7% sequential growth and 15% year-over-year. Revenues for 2011 totaled to a record amount of $167 million, an increase of 16% compared to revenues of $144 million in 2010. The deferred revenues have increased during this year totaled to $52.5 million at the end of the year, up from $51.5 million at the end of 2010.

The non-GAAP net profit this quarter has increased to $9.5 million, or $0.42 per diluted share and represents a dramatic improvement compared to a net profit of $6.6 million, or $0.29 per share in the fourth quarter of 2010. The non-GAAP net profit for 2011 amounted to $30.7 million, or $1.30 per diluted share, an increase of more than 50% compared to a net profit of $20 million, or $0.92 per share in 2010.

Stock debt --- stock-based compensation expenses in the amount of $1.6 million, amortization of intangible assets in the amount of $1 million and exchange rate expenses in the amount of $300,000 brings GAAP net profit this quarter to $6.6 million, or $0.20 per share, compared to a net profit of $3.9 million, or $0.17 per share in the fourth quarter of 2010. Non-GAAP gross margin increased to 82%. Non-GAAP operating expenses reached $28.1 million, bringing our non-GAAP operating profit to a record of 20%. The headcount for the end of the year was 733 employees.

During the fourth quarter, we generated cash in an amount of $12.5 million, bringing our total cash generation in 2011 to an amount of $40 million. Thus, our cash position, including short-term and long-term deposits and marketable securities, to an amount of $219 million and we have no debt. Shareholders' equity is about $219 million.

Guidance for the first quarter. We expect revenues to range between $43.5 million to $44.5 million, 82% gross margin, operating expenses will range between $28 million to $28.5 million, financial income at $1.1 million and non-GAAP EPS to range between $0.34 to $0.36.

As you can see, ladies and gentlemen, revenues are up, gross margin increased, operating profitability has improved and reached our 20% target. Cash is up by $40 million for the year and we expect higher and better results in 2012. And now I would like to turn the call over to Roy.

Thank you, Meier. Our fourth-quarter results reflect another quarter of strong performance. During the quarter, we saw significant traction for our Data Center Virtualization and cloud-computing solutions, as well as our Attack Mitigation System. We believe these solutions are expanding Radware's addressable market from the traditional load-balancing and application delivery use cases to become the control plane in the critical component in data center and carrier infrastructure.

Last quarter, we unveiled the second phase of our VADI strategy, VADI 2.0, including new application delivery controller platforms, enhanced data center management and orchestration interoperability, support for all leading hypervisors and new AppShape technology to provide the industry's first application delivery fabric. The Radware application delivery fabric breaks new ground in virtualized application delivery by leveraging the concept of a virtual ADC or vADC resource pool across both single and multiple data centers.

The ADC fabric transforms physical application delivery units to services regardless of the underlying computing resources for increased agility and simplified operations. A key component of Radware application delivery fabric is a new technology, the Radware AppShape. This technology provides an application perspective for shaping the data center infrastructure to specific application needs. AppShape dramatically accelerates the rollout of new business applications and services, which can be integrated into the virtual data center and cloud ecosystems. In the coming months, we are releasing the AppShape module for leading applications such as Microsoft SharePoint, Microsoft Exchange, Oracle and SAP to take application delivery fabric, agility and simplicity to the next level. We continue to see many projects for ADC consolidation and a lot of new projects opening up for VADI solutions as customers recognize the strong ROI and improved IT agility resulting from these solutions.

Last but not least on the application delivery front, we are starting to see field activity with Juniper based on the application delivery control blade for the Juniper MX Series routers. Juniper is now in multiple labs of Tier 1 carriers and won several proof-of-concepts across the world. We will recognize initial revenues in Q1. While the actual sales push is just at the beginning, we are very encouraged by the type of opportunities Juniper is bidding on with the application delivery blade.

Switching to the application security space, our Attack Mitigation Solution, or AMS, continues to prove its unique capabilities in blocking major cyber attacks on our customers' data centers. We believe we are if not the only solution then one of very few that can deal with the rapidly evolving threat landscape.

Recently, in Israel, we witnessed major attacks against the Israeli airlines, the federal private banks, the Tel Aviv Stock Exchange, newspapers, hospital and the Ministry of Foreign Affairs. All customers that were using our systems were able to protect against the attacks in a matter of seconds while unfortunately those who were not using our Attack Mitigation Solution failed. Following these incidents, more than 30 customers have deployed our solution in their network or subscribed to cloud services that rely on our solutions. These incidents join a long list of successes, including protecting two of the top five largest stock exchanges in the world from attacks that tried to bring them down in the second half of 2011.

Our solution is unique in the fact that it combines multiple security technologies, including denial of service protection, intrusion prevention, Web application firewall, network behavioral analysis and reputation services all together to protect against data center attacks.

Our Attack Mitigation Solution is built on top of our high capacity, scalable, on-demand Switch 3 platform that includes special security hardware to accelerate protection against large-scale attacks. Coupled with our ERT, emergency response team that provides real-time assistance to customers under attack, we provide a complete solution of people, process and tools to protect mission-critical environments.

During the fourth quarter, we announced a $2 million sale of our AMS security solution to a leading Tier 1 wireless carrier in North America. These systems will be positioned in front of the wireless business data centers to protect them against cyber attacks. This order is another testament of the large potential in this market and the strength of our solution.

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 2012. Let's take a bottom-up approach starting from the markets, next moving to our offering and lastly, summarizing the loyal customer base.

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. That coupled with ongoing demand for security and compliance results in strong market demand for our offerings. We believe we are early in this cycle and more will occur in the coming years with major investments from customers and vendors.

In the carrier markets, clearly, mobile data and mobile applications are the number one driving force. Carriers are transforming from supplying minutes and bandwidth to becoming application providers. This highlights the criticality of application traffic management and acceleration as meaningfully improving the profitability of the carrier business model, as well as for service differentiation.

We believe that also in this front, we are early in the cycle and we have the forecasted exponential growth in mobile data in the coming years, the investments in LTE and IPv6 migration. It is easy to see why we are enthusiastic regarding market opportunities in this segment.

On the product side, we firmly believe we have a strong technology lead. Our entire product portfolio is based on the on-demand switch platform that today provides hands down the best performance, cost performance and TCO in every market segment we play in. Our value solutions are exactly on mark with the next-generation data center and the data center consolidation initiatives of our customers.

In addition, last year, we strengthened our offering with the high-end chassis-based Alteon 10000 that caters to large enterprises and carrier data centers. The recently announced in Q4 Alteon 5224, which addresses the enterprise market, and with the application delivery blade for Juniper that accommodates the carrier network space.

On the security side, over the past five years, we've developed unique capabilities based on countless years of research and patented algorithms, which makes us extremely strong in combating emerging cyber threats.

The last element is our customer base. With 10,000 customers worldwide in the medium to large enterprise and carrier markets, we are very well-positioned to enjoy the trends I mentioned and leverage our product offering.

To summarize, today, we have a leadership position in the market that is strengthening every quarter. We have consistently grown our revenues quarterly and yearly. We have steadily developed and introduced market-leading solutions targeting key market trends and as Meier mentioned, we have demonstrated increased efficiency in our business while continuously improving our operational results.

Before concluding, I would like also to thank our customers and partners for their continued support and trust and the whole 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.

Thank you. Good morning. If I look at the growth rate thus far, it seems to be stabilizing and we are seeing consistent growth on the top line in the mid-teens. As we look at 2012 with all the new applications, the wireless data centers and also new products, any thoughts on how we might be able to replicate the level of growth in 2012 from 2011 or just maybe in rank order where you see the greatest rate of growth by end market? That would be helpful.

So we think that the growth, as we see that, can continue based on the new offerings and we see several areas that growth can be accelerated and I tried to mention them. Better execution on the VADI project where we feel we have a strong lead can definitely accelerate our revenue growth. Continued growth in the Attack Mitigation space where we see many, many incidents growing in number and the complexity, that's definitely a strong driver. And as I have mentioned, OEM revenues from the likes of Juniper is a third area that we see potential for accelerated growth.

On Juniper, any updates on maybe the pipeline, the engagement and how that might be trending quarter-to-quarter and possibly the outlook there?

So the first quarter was Q4 basically I think now end of January we are three months into the product being [NGA]. We are now running several of -- or, better phrase, Juniper is running several proof-of-concepts with Tier 1 carriers across the world. There is a significant pipeline. The timing of the close of each of those projects obviously is not dependent on us, but the opportunities are very sizable to our numbers and we believe provide us with expanded market reach. Those projects we were not able to bid on by ourselves and they are solely on carrier network space, so it is completely expanding the addressable market, as well as our win probability.

Got it. And then, Meier, on the financials, you saw a boost in gross margins. How should we think about the sustainability of the improvements in gross margins over the next -- for the foreseeable future? And likewise, operating margins, how should we see the trajectory and maybe what you might be thinking in terms of operating margin for the full year and how we might exit 2012 operating margins?

Okay, about the gross margin, the gross margin is up due to different mix of product increasing sales of our software-based solutions as part of our BBI. We expect to maintain these high gross margins because those standards I mentioned will continue into 2012 and you can see top line the guidance for the Q1 that we said that gross margin is 82%.

About the operating margin, we believe that we can continue and increase our operating margin. But as you understand that our operating margin, as well as our EPS are very sensitive to top-line changes. As a conservative measure, we expect to exit 2012 with a 23% operating margin. But, again, this is very dependent on our achievement on the top line.

Got it. 20% exiting the year. And then just maybe qualitatively, Meier, does it feel that your -- with the higher gross margins trickling down and with the better engagements, do you feel -- do you need to expand spending and hiring this year or with the partners and everything else that you might get more leverage just qualitatively?

I think we are planning to increase investment in sales and marketing. Definitely we are encouraged with the increased leverage and profitability and we believe we can turn some of this leverage back to investment in the business for better growth. So we are adding in select markets and for select initiatives more headcount.

Got it. Thank you and good luck, gentlemen.

Ittai Kidron, Oppenheimer.

Thanks and congrats on good numbers. Meier, just to clarify, did you say exiting '12 with 20% or 23% operating margin?

I said 23%.

Exiting the year. Not for the full year, of course.

Yes, okay, very good. Roy, with regards to the opportunities you are working on with Juniper on the carrier side, can you talk about the applications? Is this IP version 4 to version 6 load-balancing? Is it mobile traffic? Can you give us a little bit more color into what sort of implementations are we looking at?

Okay. So the implementations are many use cases that are using an application delivery in the carrier network. So definitely what is called carrier grade NAT, which is the IPv6 /IPv4 migration. I think Juniper is going strongly on that. Content delivery networks, we see a lot of activities in Tier 1 carriers across the world using CGN for video. That's another use case. Mobile traffic, Juniper obviously has a big initiative there and our solution is also part of supplying value-added services off mobile traffic like acceleration, like traffic redirection based on application. So that is another use case. And then very simple use cases of DNS load-balancing, (inaudible) DHCP, all (inaudible) networked resources that are positioned in the carrier point of presence. So those are the core stuff. We're also seeing some cases of firewall load-balancing, leveraging their SRX product line, etc.

Okay. And how should we think about the evolution of this partnership into the enterprise market as well, not just sort of carrier site?

So currently we are working with Juniper on the MX router. They are positioning the MX router mainly for the carrier and to a limited extent to large enterprise data centers. So obviously in these areas, we can be part of the enterprise initiatives. But for the most part, it is focused on the carrier network space.

Okay, very good. And Meier, with regards to the financials, can you talk about how do we think about OpEx through the year? And also, maybe in this last quarter, which was the December quarter, which was very good, is there any color you can give us about how much of the growth came from the security side of the business versus the actual -- the ADC market?

Okay, first of all about the operating expenses, Roy mentioned that we plan to continue as we have done in the last three years -- to continue to increase our spending and to invest in the Company. That means that we had more expenses that related to our sales marketing, some R&D and not many, if any at all, for G&A, but this is a strategy.

At the same time, we are aware to a total commitment to increase margins, so we plan the top line will run faster than the expenses. This is the most that we can share with you. We don't fully guide the market about the year. So we mentioned that we plan to exit the year with 23% operating margin. We continue to invest in operating expenses.

On top of that, I said and you have to take it into consideration that our margins and EPS are very sensitive to the increase in the top line, so everything is subject to our ability to leverage the investment that we are doing right now.

As for the split on profitability between AMS and ADC, we don't do it. We haven't done it so far, so we can't share it with you.

Well, can you just qualitatively discuss in this past quarter what was growing faster and on a near-term basis, where do you see more of the growth on a sequential basis?

Well, I think specifically in the first quarter, security was a bit ahead, but it changes every quarter. We believe both markets, the application delivery performance should grow strong and the Attack Mitigation. In application delivery, growth drivers like the carrier applications we've discussed like virtualized and cloud migration. Our key growth drivers that we've seen very strongly with VADI last year.

Very good. Good luck, guys.

Rohit Chopra, Wedbush.

Thanks very much. I wanted to come back to gross margin, if you don't mind, Meier. Correct me if I'm wrong, the Juniper product is really a software module. So is there room for a gross margin upside as you go throughout the year? That is my first question.

Yes. Of course, if we get on Juniper and all the rest are stable because you know gross margin is not only a factor of the mix of product, of the pricing in the market, etc., but if we assume that everything is stable on top of that, you blend some from Juniper, so gross margin will go up, yes.

Okay. And then could you also talk about the geographic mix, if you can go through the different regions and also the enterprise service provider split?

Okay, the regions split 27% for the US this quarter, 37% for EMEA and 36% for Asia-Pacific. As mix of enterprise and carrier, carrier was 32% this quarter while enterprise 68%.

My last question is this, just on taxes, it looks like they are starting to go up. Is that due to selling your product to Juniper? Does that make sense?

No, this is -- all our tax rates, this is as we become more profitable, so we have to pay more taxes. Therefore, the trend will be up, but still in single digits for 2012.

Thanks, Meier.

(Operator Instructions). Liron Rochman, Oscar Gruss.

Thank you. (inaudible) in EMEA in this quarter was very strong. Can you elaborate a little bit what is going on there? It doesn't look like you see any weakness over there.

We are very pleased with our performance in EMEA. We continue to see strength in the market. I think the main reason given the economic climate is the fact that we are selling to mission-critical environments. So both on the application delivery and definitely on the security solutions, we're clearly targeting very mission-critical environments and we continue to see both enterprises, carriers and even governments investing even in these times in these solutions. So obviously we are cautious about 2012 for EMEA, but so far so good.

Okay. And then regarding Juniper, can you tell us what kind of feedback you get from Juniper clients so far, how do they see this product?

So I think you know when a Tier 1 carrier is doing a real proof-of-concept and has a project plan to install, it is obviously because they see clear value in that product. We are seeing a growing pipeline with the largest of the carriers in the world, so the feedback is very good. The key concept here is that it simplifies the network architecture of these carriers because they don't need another layer of application delivery devices.

So they improve by removing those devices and making them a software on top of our Juniper routers they already have. They remove complexity from their network, they improve availability because there are less components. They simplify the operation because they have teams that are already fully trained on the Juniper router and they save CapEx and OpEx. So it is a very clear proposition, value proposition for them and I think we are very enthusiastic on the potential of this joint solution.

Understood. And is that product -- really can completely replace the legacy ADC or they still need some hardware in order to get better execution or better products? Can you elaborate about that?

So for the use cases I have mentioned, the Juniper blade is a fully featured application delivery component. It runs our software. So for all the carrier network use cases that we've discussed on the call, you don't need another ADC. We are running in a Juniper router on a dedicated blade or blades. You can put more than one in a router with dedicated hardware that does the application delivery services. So it completely removes the need to have physical devices after the router.

So that means that you won't have any upsells for those clients that will be separately from Juniper?

This is -- For the specific applications I have mentioned, there is no need. But obviously the whole data center, the cloud projects, their IT and some on is a huge upsell opportunity for us, leveraging the installed base of Juniper.

Okay, understood. Thank you very much. Good luck.

Thank you. I am showing no further questions at this time. I would now like to turn the conference back over to Mr. Zisapel for closing remarks.

I would like to thank everybody for joining us today and have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.