Radware Ltd (RDWR) 2012 Q2 法說會逐字稿

Good afternoon, and thank you very much for standing by. Welcome to the Radware second-quarter 2012 results. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session, at which time (Operator Instructions). I must advise you all that this conference is being recorded today, Thursday the 26th of July, 2012.

I would now like to hand the conference over to your speaker for today, the President and CEO of Radware, Roy Zisapel. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to Radware's second-quarter 2012 earnings conference call. Joining me today is Meir Moshe, our Chief Financial Officer. Meir will start the call by reviewing the financial results, and afterwards, I will discuss the business highlights of the second quarter. After my comments, we will 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 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. (inaudible) to document 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. Now, ladies and gentlemen, for the financials.

Revenues for the second quarter totaled to a record of $46.8 million, representing 14% increase year over year. Non-GAAP diluted EPS amounted to $0.43. Non-GAAP operating expenses amounted to $28.7 million, bringing non-GAAP operating profits to $9.8 million, or to a record operating margin of 21%.

The non-GAAP net income for the second quarter of 2012 amounted to $10 million or $0.43 per diluted share compared to a net income of $7.3 million or $0.32 per diluted share for the second quarter last year.

Stock-based compensation expenses in the amount of $1.4 million, amortization of intangible assets in the amount of $760,000 and exchange-rate expenses in the amount of $300,000 brings the GAAP net income this quarter to $7.5 million or $0.32 per diluted share, compared to a net income of $4.9 million or $0.21 per share in the second quarter of 2011. The non-GAAP gross margin remained at 82% as in the previous quarter. The headcount for the end of this quarter was 764 employees.

During the second quarter, we generated cash from operations in the amount of $11 million. Our cash position, including short-term and long-term bank deposits and marketable securities, increased this quarter to $250 million, while we have no debt. Shareholders' equity amounted to $247 million.

Guidance for the third quarter. We expect revenues to range between $47 million to $48 million, 82% gross margin, operating expenses will range between $28.6 million to $29 million. Financial income at $1.3 million and non-GAAP EPS to range between $0.44 to $0.45.

As you can see, ladies and gentlemen, revenues are up, operating profitability continues to improve, cash is up by $11.4 million, and we expect better results in the next quarter. Now I would like him to turn the call over to Roy.

Thank you, Meir. Before I address the key operational highlights of the quarter, I would like to take a moment and comment on the Juniper Riverbed deal. We were aware of the enterprise opportunity at Juniper. Juniper, as announced in their earnings release, wanted to purchase a licensed source code in the application delivery space and integrate it into their product targeted at a data center.

Without commenting too specifically on the deal, Radware's strategy is to partner for the long term and build OEM channels. We don't think that selling or licensing our intellectual property for these amounts is a good business decision for our Company.

We continue to maintain a constructive and strong relationship with the carrier side of Juniper, where we provide the application delivery for their MX platform of carrier routers. And, as we own the underlying intellectual property, we will continue to develop significant enhancements to the capabilities and functionalities of the core application delivery engine, which will be incorporated in the products we sell directly to our enterprise and carrier customers, as well as in the products that reach the market through our partners, such as Juniper.

Regarding the enterprise application delivery, we don't believe Juniper will be in the market with an enterprise application delivery offering for at least two years or more. With our current investment of over 350 R&D people and our increased investments in this space, we expect to make significant advances from our current technology-leading market position that we feel will be quite difficult for others to match.

In addition, our view is that selling standalone application delivery products to the enterprise market requires sizable sales and system engineering specialization, a capability that is a significant barrier to entry.

I would also like to take this opportunity to reiterate that we believe that the OEM channel will be tremendously rewarding for Radware over the coming quarters and years. We will continue to work on expanding our partnership model by aligning ourselves for each market segment with the partner that we believe can best serve that specific market.

We believe Juniper will be a very successful partner in helping us significantly grow our share in the carrier routing marketplace worldwide. A good start to that is our recent joint win of a US Tier 1 carrier.

For the security market, we chose to enter into a strategic OEM agreement with Check Point, an industry-recognized leader in security technologies. The Check Point partnership will provide us with the advantageous ability to expand our footprint within the network security market.

Along these same lines, we will continue to actively pursue other strategically desirable and potential partners for Radware in the enterprise data center market.

Returning to our discussion of the quarter and our business, we remain focused on two key markets, application delivery and application security. Our application delivery growth drivers are strong, with data center consolidation, virtualization, cloud computing and mobile data needs top of mind with our customers. As we are involved in more strategic projects today that are fundamental to the IT strategy, we clearly see expansion in Radware's addressable market from traditional load balancing and application acceleration use cases to an application delivery fabric and therefore position ourselves as a critical component in data center and carrier infrastructures.

In the application security, the rise of cyber attacks and our unique ability to detect and mitigate these attacks in real time are obviously of extreme value to our customers.

This quarter, we enjoyed significant growth in North America across all market segments including enterprise, online and carriers. Both our Attack Mitigation Solutions and our Application Delivery Solution with its leading virtualization architecture are gaining traction, and we have secured major wins with several new customers.

In the second quarter, we continued to see significant sales from our chassis-based Alteon 10,000 product line. The key strength of the product is its market-leading application delivery performance, the ATCA standard-based architecture and our VADI capabilities that allow our customers to consolidate up to 256 instances into one platform, 16 times higher than the competition.

Already we announced that a US Tier 1 carrier selected the Alteon 10,000 for scaling their DNS infrastructure with an initial deal size of $2 million. I am pleased to report that this month, July, we received a follow-on order of $1 million, which further extends the Alteon 10000 footprint within this US carrier.

In addition, we announced major wins for our Attack Mitigation System with two leading social networking companies. These deployments of Radware award-winning Attack Mitigation Solution address expanding network security needs, including improved protection against a range of sophisticated next-generation cyber attacks. The combined agreements represent a multimillion dollar investment in our network security solutions from these leading companies.

On the product front, we continue to innovate, releasing two major introductions this past quarter. The first is FastView, which we see as a major competitive advantage for us going forward. FastView is a fully-integrated Web performance optimization model that significantly accelerates the response time of both Web portals and internal mission-critical applications. FastView dramatically enhances our application acceleration capabilities, resulting in maximum business impact, including more page visits, higher customer loyalty, more returning customers and high revenues for eCommerce, eRetail, Web portals and online financial services.

Coupled with FastView, we also announced an Application Performance Monitoring module that enables users to monitor end-to-end Web application response time with the ability to drill down to the application, transaction and geographic location level. That provides the capability to visualize the performance different users experience in different locations in real time and based on user-defined SLAs.

We believe FastView and APM extend our leadership position in application delivery and are another testament to our ability to innovate and provide customers with unique solutions to address their key business problems. We foresee FastView and APM being major differentiators for us, together with our value solutions for virtual and cloud data centers.

The second major innovation focuses on the Software Defined Network front. We are providing application delivery and security solutions for SDN, and specifically OpenFlow. We are first to market with these solutions, presenting in the key industry forums, and we've announced our partnership with NEC in this space. Radware and NEC created a joint solution which integrates Radware AMS into NEC OpenFlow-based switches and controllers. The joint solution enables customers to extend the advantages of the SDN approach and provide a network and application security network that dynamically assigns security protection resources that can be customized per need real time.

Continuing on the topic of partnerships, I wanted to further expand on our OEM agreement with Check Point. Under the agreement, a new line of Check Point DDoS Protector appliances is based on Radware DefensePro product line. Check Point is offering several models, all of which are completely integrated to the Check Point management system, and the two companies have an agreed roadmap to extend the offering. We are excited about this partnership as it allows us to broaden our reach and penetration of the security market. Although recently launched, the product line has already gained strong momentum in the market.

To summarize, we feel very strong about our market positioning with more and more leading and market-differentiating capabilities being announced every quarter. We have consistently grown our revenues over the past several years. We have a solid go-to-market strategy for each target market and several partnerships with leading vendors that serve these markets. And we have demonstrated increased efficiency in our business and operational results.

Before concluding, I would also like to thank our customers and partners for their continued support and trust. I would like to thank the Radware team for all their efforts, commitment and success in growing our business. And with that, I would like to open the discussion for Q&A.

(Operator Instructions) Joseph Wolf.

Thank you. I wanted to ask two questions. The first is you gave some good detail on the OEM agreements. And I'm wondering if we could get updates perhaps on both the Check Point and the Juniper with regard to revenue progress and when we can start to see the benefits of that also on the margin side of the business.

And my second question is with regard to the Software Defined Networks, which was also helpful. Could you go into a little bit more detail about what -- exactly what the Radware approach is and how this fits into both the attack mitigation and the, I guess, traditional load-balancing applications that Radware is running, and I guess the hardware/software implications of SDN.

First, on the OEM revenues, we don't break it specifically. But as I've mentioned, we've jointly won with Juniper a major US Tier 1 carrier, and we will be recognizing those revenues. So that is a very good, large deal signed and we have activities in others as well.

Regarding Check Point, Check Point we announced the OEM agreement very late in the quarter. I think it was in June, the last two weeks. So we've done a bit of sales in Q2, but obviously we are seeing a good ramp in this quarter and going forward. So definitely, those OEMs are starting to contribute to revenues.

Regarding the margin enhancement, the Juniper deal is a software-only. The Check Point deal is a complete product. So there is different margin impacts for each partner.

Regarding your second question on SDN, so SDN is dealing with the layer two and layer three of the network, the connectivity. On top of SDNs, though, you need to provide advanced application services. And there is key questions -- how do deploy security, load-balancing acceleration into an SDN architecture. That is where our focus is, and our solutions are enabling application delivery, application security, (inaudible) service protection in an SDN architecture, and together with NEC, we have a joint solution that we are start to market, and that's that.

Just as a quick follow-on, does that enhance the revenue opportunity, extend, make it more of a virtual solution?

I believe it extends the addressable market, because with SDN, we are talking about new data center architectures and buildouts. And obviously, as part of a complete data center architecture and not only a specific application need, we will be deploying our solutions. So definitely -- I tried to address it in our prepared comments -- we are seeing the addressable market enhanced with more strategic data center architecture projects.

Okay, great. Thank you.

Ittai Kidron.

Roy, I do want to go back to the Juniper Riverbed announcement. You mentioned a few things; for example, that Juniper won't be in the market for three years, that you don't want to license your software for that price, if I remember -- for that amount -- if I remember, that was the exact wording.

You have maybe 4%, 5% market share in the ADC market. There is a big, massive market out there. And even if you are successful and manage to double your market share from here, it feels like there is so much more out there in the very high end of the data center, which is where Juniper was targeting this, that they can do that you might not have a reach into. So just from a pure go-to-market, it doesn't seem like there is a conflict here. So why not sell to Juniper?

I think first on the market share, we have different data on our total market share and definitely our view of the overall market.

Regarding the ADC market as a whole in the go-to-market, I think we need to differentiate between a standalone ADC being sold in the market. And obviously, if it is based on our software, it completely overlaps to our sales and product offering. And with an IP licensing deal, you don't enjoy any future revenues. So regardless of the amount, if we have today roughly a $200 million business, all of that business is in an overlapping position.

Concerning their solution as an integrated product, then the addressable market is the Juniper market share in the data center switching business, which is growing, and we have all these aspects with Juniper. But I don't think by any means it covers the whole data center opportunity.

As I've mentioned in our comments, our strategy is focused on OEM and long-term relationships that are [inflating] to market share. Not only into cash on the balance sheet, but real customer acquisition and an ongoing customer relationship. And it's focused on aligning ourselves with the best partner for each market opportunity.

We do believe that Juniper is a great partner for us on the carrier routing, given their market share and success. On security, for example, a similar question can be posed -- who was the best partner. We thought that although Cisco is playing there, Juniper is playing in this space, Check Point is playing in this space, we thought that Check Point is our best partner for that market. And for the enterprise data center, I think there is some relevant options that we are pursuing.

Okay. Is it still Juniper -- if Juniper is going to be very successful with its data center switch architecture, they will have, in a good scenario, 4%, 5%, 6% of the data center market, which is going to be considered a very strong success for the company. $75 million to you in licensing revenue pretty much means $75 million in net income.

For you to generate $75 million in net income, you would have to generate about $400 million of hardware sales to get to that number. So you kind of walked away from $400 million in hardware sales, guaranteed, regardless of Juniper's success or lack thereof, on the potential that on the margin there's some overlap between you and them. I just -- it feels like a very big missed opportunity here.

I think I beg to differ. I apologize, but our view is different. Regarding the profit, if you look on our business model and the growth of profitability, it doesn't take $400 million of incremental revenues to generate $75 million of profit. Definitely not over a period of several years, number one.

Number two, I think the overlap, when you sell code, all your code, the overlap is substantial. And therefore, I think there is also not only an additive opportunity, but a negative. And third, you know, as a public company and long-term view, we are selling products. We are not selling IP.

With regards to the carrier side -- and I understand Juniper's and your statement that you are still partners and everything. But logically speaking, why wouldn't you think that Juniper could take that Riverbed code and within a two-year timeframe replace you out of that opportunity as well? Because they've already paid for the Riverbed code. So it will be a [sunk] cost from their standpoint; they won't have to pay anything incremental to do that. Whereas for you, they still pay you licenses each time they sell this.

In theory, everything is possible, but I think also Juniper was very clear about their intention. From a practical point of view, I think there are several differences. First, the use cases of the ADC in the carrier space are very different than ADC in the data center. Just in short, we are talking about additional protocols, not only Web-focused; but there is SIP, there is diameter, there is DNS, there's content delivery networks and so on.

Second, from a deployment point of view, the load balancer is transparent versus playing a server role in the ADC. And I can continue on and on. I don't believe that the code that Juniper licensed has these capabilities. So it is not just integrating that code. It is net new developments that they need to do, and I think those developments, from our own experience and from market experience, those are substantial.

Second, I think there is an architecture difference. The MX router -- I don't want to go into too many details -- but the architecture and the way it works is very different than the Intel-based ADC appliances for the data center. So a different architecture of software is needed to be integrated.

All of that leads me to -- and I think also Juniper to the conclusion that it is better to partner there with an industry-leading ADC that is ready to market and that they are actively selling to their customers. And I believe this relationship will continue. We will definitely continue to evolve that, so not only to keep the current leadership position, but also to extend the capabilities of the blade, and I think then it is a win-win for both companies.

Very good. And lastly, regarding your guidance, at the midpoint of your guidance, you have a $700,000 increase on a quarter-over-quarter basis. It sounds like Check Point is -- I think you mentioned is seeing strong momentum, and I would assume it will start contributing already in the third quarter -- correct me if I'm wrong. If so, is there growth in your core business in the September quarter, or much of the increase here is really through the increased traction through the Juniper carrier side and the Check Point OEM relationship?

As for the guidance, the September quarter is backend-loaded, and thus guidance needs to be conservative. In addition, the global macro economy requires extra caution, we believe. Please also bear in mind the weakening of the euro affects negatively our top line (multiple speakers).

So there is a little bit of caution there -- more caution than normal, then, with respect to the guidance?

Correct.

Okay, and lastly, Meir, can you just clarify -- FX, what is the impact there, what is your exposure? Do you price in Europe in euros or in dollars and what is the impact there?

In Europe, in the Euro countries, we price in euro, and the effect there on the top line was last quarter $150,000. This quarter, it remains same; it will be even higher than the impact on the top line.

Very good. All right. Good luck, guys.

(Operator Instructions) Rohit Chopra.

Thanks very much. Meir, I just wanted to ask you about the target model for the end of the year. Are you still targeting operating margins of 23%? And then maybe you could just look forward into '13, should we expect ongoing increases in operating margin?

And then could you also talk about the growth of the security business? Security, I think, is somewhere between 20 and 25. I just want to know if that is growing faster than the core business, if you don't mind.

Okay. As for the business model, you can see that this quarter, actually, we delivered 21% of operating margins. If you calculate our guidance for the September quarter, so our high-end guidance represents 22% of operating margin. So exiting the year with 23% operating margins, it looks achievable, and we reiterate that one.

As for the next year, and taking into consideration the leverage that we have in our business model, if revenues are up, the top line is up, it also will increase the margins. But it is too early to talk about it.

Lastly, can you just go through the geographies for everybody? I think it is important to get a sense of what is happening in the different geos.

The US this quarter was 31% from the revenues, EMEA 32% and Asia-Pac, 37%.

Thank you.

Mark Sue.

Thank you. Good morning, gentlemen. How many realistic other partnerships should we think about in aggregate number? And in which quarter -- or can these collective partnerships reach 10% of revenues, and when do you think that might be?

I think it depends on the market segments we are targeting, but there is definitely room to two, three more based on the specific markets we are targeting. I don't want to comment specifically on the quarter of the announcement. Initially, beginning of the year, we said we will announce in the second half another partner; we've announced Check Point already in June. So those cycles are long coming. When we will have the agreements to report on with our partners, and we will be ready, we will definitely share it.

Okay. Could we get to 10% by the end of this year for revenues?

I believe it is possible from all the OEM relationships, yes.

I see. And Roy, if we look at your revenue growth rate, and we just kind of look at the trends and average, it has been -- your Company has been growing at about 14%, 15% year-over-year. Should we think of the new partnerships as additive to that top-line growth, or does that offset some of the maturing segments in other regions or other customer segments, so that when we add the partnerships, we still get 14% to 15%? Or should we think about 14%, 15% and then add everything on top of that?

Our plan is obviously that it is additive. That is how we manage those partnerships, to minimize overlap to our own business. So as more and more of those partnerships kick in and as our core business continues to grow steadily, we do believe there is room for acceleration, definitely.

Okay, that's helpful. And there's just one last thing. If we think about the seasonality of your business and the potential seasonality of your customers, offset by the initial ramp, is there some thought that you might be able to grow revenue sequentially every single quarter on a going-forward basis, or should we factor in just regular seasonality for you in the March quarter?

I think we should target at this point definitely regular seasonality. I believe also the two partners that are public now, Juniper and Check Point, also experience the same seasonality. I believe it is the overall market seasonality, as well. So I do believe that is the right assumption.

Okay, thank you and good luck, gentlemen.

(Operator Instructions) [Mike Glass].

Good morning. Could you describe your current relationship with IBM and what you are doing to expand your relationship?

Okay. We have an alliance with IBM across multiple fronts. We are an approved partner for the cloud business, the smart cloud enterprise. We are an approved partner for their next-generation fuel system server and computer for the cloud with our Alteon VA. And then we have certain go-to-market programs across the world with them.

So currently, they are a lease seller for us in certain parts of the world in certain customers, and we have corporate programs around cloud and the next-gen fuel system with them.

Are you looking to expand your relationship with them?

Definitely. We see in IBM a very big opportunity for data center as a whole and go-to-market, and we are looking to increase business with such partners.

Thank you.

[Noah Steinberg].

It sounds like your cash seems to be growing quite nicely. Can you talk a little bit about what you could do with over $250 million in cash?

I think the main target for us in use of cash is definitely for acquisitions, to find companies that can enhance our go-to-market end solution. We've done several of these in the past. We think we have a good track record with that and good track record in the ability to leverage that. And as a result, we are looking to see what makes sense for us.

Could you also break down the carrier or the enterprise divisions, please?

Carrier this quarter was 30%, and the enterprise 70%.

Okay, great. Thanks.

Thank you. (Operator Instructions). There seem to be no more questions, Mr. Zisapel. Please go ahead.

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

Thank you very much. That does conclude our conference for today. Thank you all for participating. You may all now disconnect.