Radware Ltd (RDWR) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Radware Ltd. 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 with instructions to follow at that time. (Operator instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Roy Zisapel. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to Radware's first quarter 2012 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 first quarter. After my comments, we'll open the discussion to Q&A.

Okay, thank you, Roy, and welcome, everyone, to our first quarter conference call. First I would like to read you the Safe Harbor language. During the call 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 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 2012.

And now, ladies and gentlemen, for the financials. Revenues for the first quarter totaled $45 million, representing 17% year-over-year growth. Non-GAAP EPS amounted to $0.39, $0.03 to $0.05 better than guidance. Non-GAAP operating expenses amounted to $28.4 million. The non-GAAP net income for the first quarter of 2012 amounted to $9 million or $0.39 per share compared to a net income of $6.1 million or $0.27 per share in the first quarter of 2011.

Stock-based compensation expenses in the amount of $1.6 million, amortization of intangible assets in amount of $800,000 offset -- and offset of exchange rate income in the amount of $300,000, bringing the GAAP net profit this quarter to $6.9 million or $0.30 per share compared to a net gain of $4.4 million or $0.19 per share in the first quarter of 2011.

The non-GAAP gross margin remains at 82%, as in the previous quarter. The headcount for the end of the quarter was 759 employees.

During the third quarter, we generated cash in the amount of $20 million, including $13 million from operations, but our cash position including short-term and long-term and bank deposits and marketable securities increased this quarter to $239 million, and we have no debt. Shareholders equity amounted to $236 million.

Guidance for the second quarter -- we expect revenues to range between $46 million to $47.5 million, 82% gross margin. Operating expenses will range is $28.6 million to $29.2 million. Financial income at $1.2 million and non-GAAP EPS to range between $0.41 to $0.44. As you can see, ladies and gentlemen, first quarter results exceeded guidance and we expect better results in the next quarter. And now I would like to turn the call over to Roy.

Thank you, Meier. Our first quarter results reflect continued traction and strong leverage from our business model. In fact, in the last several quarters, we achieved strong sales results, and as with the guidance we have provided, we are targeting and expecting a record quarter in the second quarter across all financial metrics.

We are pleased with the progress we are making on the key points of our strategy -- focusing on data center delivery and application security, benefiting from virtualization and cloud computing growth drivers in the enterprise market, and mobile data growth drivers in the carrier market, growing our business with our existing customers and increasing our channel network and market systems. This quarter, we enjoyed significant growth in the US across all market segments, including enterprise, online and carriers. Also, our Attack Mitigation System and our application delivery solution with its leading virtualization architecture are gaining traction, and we are securing wins with major new customers.

In Q1, we recorded significant sales from our chassis-based Alteon 10000 product line. The key strength of the product is its market-leading application delivery performance, the ATCA standards-based architecture and our VADI capabilities that allow our customers to consolidate up to 256 application delivery instances into one platform, 16 times higher than the competition.

We landed several tier 1 carriers, online companies and financial institutions with the sale of this product, and we are encouraged by additional wins for the product line last month as well as the pipeline for the coming quarters. We continue to innovate and lead the market in application delivery virtualization, and we provide today the strongest solution for virtual and cloud data centers. These past quarters, we continued to release additional components of our VADI, virtual application delivery input patchwork strategy.

On the product front, we made a very important announcement last quarter with the new Alteon 5224 application switch. The Alteon 5224 application delivery controllers delivers the highest performance, on-demand scope and scalability and highest pod density than any other platform in its class. We are offering the only 10-gigabit connectivity and application delivery virtualization capability in this market.

Those two key points -- one, being the first application delivery platform to bring 10-gig connectivity to the midsize enterprise, supporting them with their migration to 10-gig networks and servers; and, two, being the only platform that provides mid-sized customers with the ability to consolidate and virtualize their application across their own data center. These two key points are very powerful differentiators for us. We've received strong market reception for this new platform with several new customer wins across all new geographies.

With the Alteon 5224, we have the only product line in the market that is scalable on-demand from 1 gig all the way to 80 gig, and the only product line that supports application delivery instances across all form factors with seamless integration to data center orchestration systems.

Our solution leadership in the cloud data center has translated into multiple wins in the industry. In Q1 we announced that KPN, the Netherlands' largest carrier, has standardized on the Radware VADI solution to power their data center hosting and cloud services. One of KPN's key requirements when they designed their cloud data center for the enterprise customers was that each customer would have an isolated environment from service level [to] customer and security for each customer's information could be guaranteed. Radware with VADI was the only solution that allows KPN to provide full application delivery isolation with the required customer density per platform. KPN purchased several Alteon 5412s that can grow up to 28 instances and are purchasing more platforms in more instances as their business is growing.

The superiority of our VADI solution allowed us to earn more product awards. This time, our ADC-VX retransmission platform was the winner of the 2011 cloud computing excellence award by the Cloud Computing magazine.

On the vendor alliance side, Red Hat shows our Alteon virtual appliance as the full partner for the Red Hat Enterprise virtualization platform. Alteon VA for Red Hat Enterprise is a fully functional application delivery solution packaged as a virtual appliance running on the Red Hat Hypervisor. It is the only application delivery solution certified for Red Hat Enterprise virtualization environments. Through this partnership, every Red Hat customer can purchase Alteon VA through the Red Hat marketplace whenever they need load balancing and acceleration for their application.

Moving now to security, in the first quarter there were several cyber attacks around the world that we were able to stop and thus our customers' mission-critical systems. We have seen a lot of traction for our Attack Mitigation allusion as more and more enterprises and carriers recognize that traditional security devices such as firewalls, intrusion detection systems and antivirus cannot block the current attack vectors.

In addition, we published a 2011 global application [record] security report, which contains the most detailed industry view on cyber attacks, given our key role in researching, fighting and stopping them. Contrary to conventional thinking that large bandwidth cyber attacks wreck the most damages on enterprises, our security experts found that bigger problems usually arise from lower-scale attacks targeting application and business layers.

To summarize, today we have a leadership position in the market as it relates to our products and solution offerings. We are introducing key innovations into the market, both with our VADI strategy for application delivery virtualization and our Attack Mitigation solution. We have consistently grown revenues over the past several years and we are also optimistic for this year's growth opportunities. We will continue to demonstrate increased efficiency in our business, and we have continued to forecast additional improvements in our operational results.

Before concluding, I would like to thank our customers and partners for their continued 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.

Okay, thank you. Good morning, gentlemen. If I look at the business, it's been kind of running around 15% to 16% year-over-year growth. Do you feel that sort of the normalized run rate for the business? And what might drive that higher this year? Maybe if you could give us your thoughts on any acceleration by vertical, telcos or data centers which can add to that base?

I think, you know, if we look on the drivers for growth, mobile data and the enterprise virtualization and cloud data centers, those are definitely areas that allow us to grow faster, as well as the cyber security area. Assuming the attacks will continue in the pace that they are, I think this business is also focused to accelerate over time.

Beyond that, as we've outlined in other calls, the more OEM revenue we will have during the year and the next year we think also can start to contribute to the growth rate of the Company.

Okay. So, Roy, when we look at the new partners, Juniper, IBM and any others that you might be working on, collectively can they add up to possibly 10% of revenues as you exit the year? What are some of the things that you can do to kind of accelerate the development there and incentivize these partners now that the deal has been signed?

From a potential point of view, definitely those partners can grow continuously to 10% and more. That requires, obviously, also a lot of work on our side in training their salespeople, in accompanying them for the initial deals and growing the confidence and success of these partners. That's what we are doing in the field, and I believe that will translate to more and more revenues through the partners. I believe this partnering strategy that we have can be extremely successful, and every quarter we are reporting on more partners that are joining, whether it's Red Hat or IBM that you referenced, Juniper, etc.

Okay, and just maybe on Juniper, how you might be seeing the order flow, recognizing that the revenues are still very early with this partnership. Just the pipeline of activity, orders, trends, anything you can provide, that would be helpful.

I think so far, we are based on the plan, so we have recognized a small deal with Juniper's (inaudible) in Q1, and we expect more significant business to come in Q2 and be up. So we believe the pipeline is growing, the combined deal flow is growing. And now we are targeting more revenues from them.

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

(Operator instructions) Rohit Chopra, Wedbush Securities.

Thank you. I wanted to ask a couple of questions. One, on the security business, Roy, you touched upon that. Just wanted to see what the growth was like in the security business. Is it growing as fast as the core ADC business?

Than the second question is -- maybe this is for Meier, but I just wanted to get a sense of 2012. As you exit the year, where do you guys see gross margins and operating margin?

Okay, good morning. So on security, we don't break out the growth rates by product line. But definitely, we are seeing a lot of traction, especially in the US, for that solution, so where the biggest online customers or largest enterprise with online presence. That's where we see the most traction. We believe that in the coming years, that traction will also go internationally as those risks are becoming wider across the board.

As for the margins, as we said in the last call, we plan to exit the year with 23% of operating margin. As for the gross margins, it has been taken 1 point up last quarter to 10%. We expect -- the (inaudible) agree that there is room for improvement, but this depends not only on the revenues that we can get from OEM, but also on mix of the total products and the pricing in the market. So it's more complicated. So, so far, so far we've taken to the model has no change from the 82%. For the rest of the year we'll leave it to the -- [pushing forward] on the business model.

And then can I just ask a quick follow-up on geographies? Can you just break out the US, EMEA and APAC, as well as enterprise and service provider?

Okay, enterprise was 72% this quarter, service providers 28%. Geographically, the US was 32%; EMEA, 32%; and Asia-Pac 36%.

Thanks, Meier; thanks, Roy.

(Operator instructions) Ted Moreau, Knight Capital Group.

Thanks and congrats on a nice quarter, guys. A quick question, kind of follow-up on that gross margin question. Can you correct me if I'm wrong here? But I thought that the margin profile on the OEM partner business was higher than corporate average. So as that grows, wouldn't that contribute positively to the gross margins as the year progresses?

It depends on the nature of the OEMs. Some OEMs, where we supply only software, you are absolutely right. The gross margin is higher, and then that's an upside. On other OEMs where we supply complete products, including the hardware, generally the margins will be lower than the corporate average. So it depends which OEMs are more successful and to what extent we take them into the mix of the overall gross margin.

Okay, sounds good. And then, are there any -- continuing on the OEM channel partners business, are there any revenue recognition differences between the OEM channel partners and your traditional organic business?

No, this is the same.

Okay, and do any of these channel partners cannibalize any current revenue-generating programs or opportunities?

In theory, it might be. But we believe, since the market is very big, it cannot -- it's almost 100% net additions to our business, both in security and application delivery.

Okay, great. And then uses of cash -- you guys generate tremendous cash flow, which is great. Are there any technologies you need to develop to remain competitive? Or do you have any pending product intros that will cause R&D to fluctuate? So could we see R&D jump up, or could you comment on any other uses of cash?

In general, we continue to invest in our business back, both in R&D and in sales and marketing. And I think this continued investment, meaning increasing operational expenses, you should expect, as we have done in the last several years.

In terms of use of cash, we are looking for acquisitions as the key target for accelerating growth and transforming the Company. When we have something to report, we will share it.

Okay, so if you are looking for technologies, what sorts of technologies might add incremental value, then?

So, definitely, we are focused on the data center. So we are looking for areas that are complementary to our data center technology. It can be a cross-application delivery and security.

Okay, great. And then I'm assuming there's nothing that's kind of imminent here or anything like that, but do you have a time frame that you would like to add the technologies?

We don't want to speak on specific time frames. We are constantly looking, and when there's something that we feel is going to be accretive to our business model and strengthen the Company, then we act on it.

Okay, fair enough. Thanks a lot, guys. Appreciate it.

Robert Katz, Senvest.

Hi, Roy and Meier, very nice quarter. I have a question about your OEM strategy. Since this time the last month, IBM has been highlighted as, I guess, an OEM for your products now. Can you comment on how you see that relationship evolving and others like that evolving in a little more detail?

Okay, first, on IBM, our announcements were on alliances with IBM, on partnership models. So I don't want to comment on OEM relationships with IBM.

Concerning OEM strategy in general, we are seeing many opportunities for companies in adjacent spaces, in the carrier market, in the security market, in the data center market, to use our technology as part of their overall solution, especially today, when we are seeing a strong rise in carrier needs to have an end-to-end solution for LTE or 4G or, in the data center, the complete stacks of data centers by the likes of IBM and Cisco. We definitely see a very big potential for application delivery and application security being a strategic part of this overall solution. And that's where we are targeting our OEM strategy.

How do you see the receptiveness of some of these potential targets to your OEM strategy versus -- I guess some of them already have relationships with some of your peer group companies, either a resale or a joint sale. Can you comment on how you see that evolving?

I think, overall, when you integrate product, it's much more strategic than just reselling them. That's -- I don't want to -- this comment is not on a specific vendor or specific competitor; it's just on the overall solution in the market. Product integration brings the most value to the customers, and I think all vendors to see that in the same manner. And therefore, I think the OEM strategy has a lot of merit.

Thank you and good luck.

And with no further questions in queue, I would like to turn the conference back over to management for any closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the program and you may all disconnect. Have a great rest of the day.