Radware Ltd (RDWR) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the Q1 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given to you at that time. (Operator Instructions).

And also, as a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. Roy Zisapel. Please go ahead.

Thank you. Good morning, everyone and welcome to Radware's first-quarter 2013 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 first-quarter results. After my comments, we will open the discussion for Q&A. Meir?

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

During the course of this conference call, we may 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 on March 2013.

And now, ladies and gentlemen, for the financials. As we announced in our preliminary results call, revenues for the first quarter totaled to an amount of $45.1 million compared to revenues of $45 million in the first quarter of 2012 and revenues of $49.8 million in the fourth quarter of 2012.

Non-GAAP gross margin remained at 82%. The non-GAAP net income this quarter totaled to an amount of $7 million or $0.15 per diluted share, compared to net income of $9 million or $0.19 per share in the first quarter of 2012.

Stock-based compensation expenses in the amount of $1.1 million; amortization of intangible assets in the amount of $700,000; acquisition-related expenses in the amount of $500,000; and exchange rate expenses in the amount of [$200,000] bring the GAAP net income this quarter to $4.5 million or $0.10 per diluted share compared to net income of $6.9 million or $0.15 per diluted share in the first quarter of 2012.

Non-GAAP operating expenses reached $30.6 million this quarter. The headcount for the end of the quarter was 831 employees.

Following the cash payment of $8.4 million in relation with the acquisition Strangeloop, our overall cash position including cash, short-term and long-term bank deposits, and marketable securities amounted to $274 million, and we had no debt. Shareholders' equity amounted to $280 million.

Buyback -- as announced today, Radware's Board Director has authorized a share purchase plan of up to $40 million of ordinary shares.

Guidance for the second quarter -- we expect revenues to range between $46.5 million to $47.5 million, 82% gross margin. Operating expenses will range between $31.5 million to $31.8 million; financial income at $1.3 million; and non-GAAP EPS to range between $0.15 to $0.16.

As a reminder, we are hosting a financial day on Monday, May 6 in New York City. Registration is still open at www.Radware.com. We look forward to seeing you there.

And now I would like to turn the call over to Roy.

Thank you, Meir.

As we discussed on our call several weeks ago, we had lower-than-anticipated results in the first quarter. We experienced challenging market conditions in EMEA and China with lengthening project sales cycles, especially within our existing customer base.

Yet at the same time we are witnessing robust demand for our solutions in North America, with an expanding customer base and footprint. The beginning of the second quarter continues the trend we saw in the first quarter, with longer-than-usual sales cycles in EMEA and strong demand in the Americas.

However, we fundamentally believe there is no change in the growth drivers or target architecture in the applications delivery and the application security market. And we continue to believe we will be able to translate it to revenue growth in 2013.

On the technology and product front, this past quarter we acquired Strangeloop networks. Through this acquisition we launched the first new line of products, which we believe is a best-in-class web application acceleration solution. The FastView solution is offered as a physical appliance, virtual appliance, and as a cloud service for acceleration.

Our application delivery solution, comprised Alteon and FastView, offers customers accelerated end-to-end response time and improved conversion rates which is a unique capability in the market and adds to our existing competitive advantages with our VADI and application performance monitoring offerings.

Continuing on the product front, this past quarter we introduced a new cloud-based Attack Mitigation solution to protect customers against Internet pipe saturation. This new offering, DefensePipe, is an innovative solution for end-to-end attack mitigation on-premise and in the cloud. DefensePipe starts automatically once the customer's DefensePro unit detects that pipe saturation is imminent.

The customer's suspicious Internet traffic is immediately diverted to DefensePipe cloud-based scrubbing centers, and the attacks are mitigated there. The clean traffic is then sent to the organization, and regular operations continue once the attack has ceased.

A unique capability of our expanded solution is the sharing of behavioral-based line data between the on-premise attack mitigation device and the DefensePipe cloud, enabling DefensePipe to start mitigation in the cloud much faster and with greater accuracy.

With the complete set of on-premise datacenter attack mitigation capabilities, now expanded with cloud mitigation solution against pipe saturation and managed by our emergency response team, we provide the industry-leading solution to mitigate cyber attacks. Also, just introduced towards the end of February, we have experienced strong and early traction for this solution and have already closed initial customer contracts.

On the software-defined networking front, we have presented, together with Mellanox a combined solution to enable mobile carriers to leverage network functions virtualization and SDN. Through this corporation, Radware open flow-enabled Attack Mitigation System extracts network information from Mellanox 10-gig and 40-gig server NIC cards to detect and protect against security threats in real time. We see SDN and OpenFlow in particular as a major opportunity to provide application delivery and security intelligence to the whole data center and carrier networks through a software-centric approach.

To summarize, today we have a leadership position in the market as it relates to our product and solution offering. We are introducing key innovations into this space, and this past quarter releases of FastView and DefensePipe are great examples of that.

We are expanding our addressable market with highly competitive and unique product offerings. And while we experienced flat yearly revenue results, we continue to believe we will be able to translate our leading position and market growth drivers into revenue growth in 2013.

Before concluding, I would like to thank our customers and partners for their continued support and trust and the whole Radware team for their effort and commitment. With that, I would like to open the discussion for Q&A.

(Operator Instructions). Jess Lubert, Wells Fargo.

Thanks for taking my question. A couple of questions, actually. First, just a housekeeping issue. Can you give us the geographic breakdowns?

Okay. The US section, North America, 38% of revenues this quarter; EMEA, 25%; and Asia-Pac 37%.

Okay. And then when you look at the business where there were issues, did you notice it was more concentrated in security versus the ADC business? Or perhaps enterprise versus carrier? Any incremental thoughts there? Any change in the number of close rates surrounding larger deals?

The key issues were in EMEA. It was more geographic than segment or vertical. Following all our carrier business, for example, did relatively well for this quarter at 30% of total. And enterprise, 70%. So in the vertical segments and in the type of opportunities we didn't see any difference. It was focused on EMEA and to some extent in China.

Meir, how do you think about that going forward?

So as I have mentioned in my prepared comments, we still see those difficulties also in April in EMEA. Some of the deals have closed that we were expecting in Q1, but some are still going on.

So we are still seeing the same environment in EMEA, and there might be room for a bit more optimism, but all in all, it is still very challenging for us. And at the same time, the strong trends in the Americas continue, as well. And we do expect strong marketshare gains in that geography also in Q2.

It seems like it was a fairly strong investment quarter; expenses are expected to step up in the June period. So I was hoping to better understand how you are thinking about the investment going forward and what that might mean for operating margins over the next few quarters.

Has there been a decision to really see the market, to try and capture share in the Americas? And maybe that keeps margins subdued for a little while before ramping up? How are you thinking about the balance between the need to invest and growth? Thanks.

Okay. I think regarding the operating expenses for the coming quarter, there is two main factors there beyond the ongoing enhancement of our infrastructure. That is the Strangeloop acquisition headcount that -- we will see a full quarter impact of that headcount, as well as the exchange rate of dollar/shekel that plays negatively since the beginning of the year and -- to our dollar expenses.

So these are the two main factors. In addition to that, we continued to invest in R&D and in the Americas. Geography -- in Americas we do it very balanced with our growth rates, which are -- as you can see, are quite nice.

And I would like to add that as we believe in the fundamentals, then we believe that the growth is existing. We would like to continue to invest in the Company based on our plan.

By the way, if you take the high end of our guidance this quarter, you see expansion on the operating margin even in the June quarter. So to cut long story short, that based on the fundamentals and the expected growth, we will continue to invest while watching the total operating margin.

We have done it before that we expand margin, but this is based on the growth. It was in the past; it will be, hopefully, also in the future.

Very helpful. Thanks, guys.

Thank you.

Mark Sue.

If we look at the reasons and the root cause for some of the lengthening sales cycles, does anything come up aside from the macros, that -- for example, did they say we are evaluating new technologies? Are we considering a virtualization approach to ADCs? They have a lot of projects that need to go first? Any other granular data as you talk to your sales force on why major companies in the ADC market just saw such an abrupt slowdown in the market would be helpful.

So again, I would like to split its according to the region. In the Americas we see very strong investments from both the carriers and the leading financial services companies in ADC and in security.

In EMEA, the deals that we were forecasting to Q1 are obviously already agreed, and -- the customer on the exact bill of material, the deployment modes, and so on, and smaller budgeting issues. Sometimes priorities, sometimes cycles of approvals that are getting longer; and budgets that are not allocated, and so on. I do believe that also in this environment we need to improve our execution, and as we are targeting cloud computing environment, mobile data, and cybersecurity, there's definitely the pockets that are still investing greatly and on plan.

I would say that some of the obvious verticals in EMEA, like governments, maybe financial services, will experience and will continue to experience problems and lengthening sales cycles for obvious reasons. But even within that, in EMEA I believe there's enough opportunities for growth.

Roy, if I look at some of your customers, particularly at the data centers, some of them are moving towards rudimentary load balancing themselves with requiring the high-end use of ADC solutions -- those such as yourself. Is this a trend that others are considering? Basic, rudimentary load balancing that they can bring in house? How do you feel that the role of the ADC market will develop over time?

And does the growth rate actually contract for the market? And is there some element that we might move to a virtual ADC environment in the future, as well?

So there's a couple of points here. First, in the large public cloud, definitely they are building a lot of the IT systems themselves, both for security, load balancing, and so on; but our business was never reliant on them.

In order to do that, they need to invest a lot in R&D and optimize a lot of application capabilities through in-house R&D. In order to do that, you need a very big scale to support cost-effectively this.

So it is very similar to the fact that they build their own servers; they build their own network switches. But I think for the second-tier cloud providers, for carriers, for enterprises, this is not an approach that is doable.

Number one, they don't have those R&D teams in house. Number two, the scale does not allow them to build everything their own and to excel in that and to support that. So I don't see that as a major issue for the whole industry.

In terms of the virtualization in the software, obviously the multi-instance, multitenant, virtual infrastructure is core to our strategy -- that's the base of our value strategy that we are discussing for over three years. And we don't really care whether the ADC instance runs on a dedicated driver books, if this dedicated appliance runs 200 instances of our Alteon ADC, or whether this Alteon virtualized ADC runs on KVN or VMware.

For us, all those instances are the same. All are managed the same way, operated the same way -- scale, provision, de-commissions, et cetera. So virtualization is actually a very good trend for ADC and security, simply because there's more instances, there's more applications, there's more dynamic nature in the datacenter, which requires better means to deliver applications, to control traffic, et cetera. So datacenter virtualization, cloud computing in general -- private clouds and so on -- are very favorable growth drivers for our industry.

Well, I am looking forward to seeing you in the [HD center].

Thank you.

Alex Henderson.

Roy, good to give us a little bit of a sense -- it sounded like when we talked after the preannouncement that the weakness in Europe was coming predominantly from existing customers, not pre-order. And can you give us some sense of how broad a portion of your European customer base that represented?

Is that still your read of it after you've now had more time to go back and determine what the root causes was? And what portion of the weakness in Europe was the result of new customer contract wins versus old customers?

The vast majority of projects that we were expecting to close in Q1 and have pushed were in Europe in existing customers. And I think there's a good reason for that, because an existing customer has a deployment in place, especially those are upgrade projects and not expansion projects, then timing might be more elusive sometimes.

And I think, on the other hand, that as they build their NextGen data centers or as they deploy new applications, there is a sense of urgency to complete these projects. So on the one hand, the good news is in existing customers, you have quite high confidence you will close the deal eventually. On the other hand, especially in upgrade projects, if budget comes to play, they can slow down some of these projects.

So we continue to track these projects. We put a lot of focus on new initiatives, especially in the growth markets that I have mentioned, where we feel the deal philosophy and the criticality of timing close of projects is higher. And we feel we can improve the performance in EMEA.

Again, at the same time, and that is what is bit of a surprise for us. We do see relatively stable trends in Asia Pacific and very strong trends in the Americas. So very similar customers; very similar use cases. We see Americas investing quite strongly, and in EMEA we felt in Q1 a stop.

So if you look at the activity rates, when we do our VAD/VAR field checks, one of the questions we typically ask of the channel guys -- and we did this in the US -- was at the end of last year, they said that they had seen a deflation of their activity book going into Q1, but by the end of the March/April timeframe, they were talking about a reinflation of the activity books just in the business in the US was going to be better as we go into the back -- second quarter, second half.

Did you see a deflation in the activity book late last year, or any reinflation in the activity book in Europe late in the March quarter? Can you talk about how many leads you are chasing in that geography? Obviously, we don't do VAD/VAR field checks in Europe, so it's hard for us to read it.

We didn't see -- obviously, in Europe, Q4 is the strongest quarter. So obviously, closing in Q4 is much higher in EMEA. And you can call it deflating of the deal books. But that is happening every year in EMEA in Q4.

But entering into Q1, we felt we had a very solid pipeline and solid expectations. And the weakness surprised us.

A little relates to the Americas. I think you can see by our results that we had a strong Q4 and a strong Q1. And we feel that the pipeline is increasing.

So we didn't see in the Americas the regular seasonality that we generally see in the business. We actually due that to several factors. Number one, the amount of cyber attacks in the US is very high, and it is coming in waves, and that dictates a very high level of activity in all security markets.

Number two, we believe that North American carriers are investing in our type of technology for ADC and for security, and they are less bound to the enterprise quarterly seasonality. And number three, I think overall we are strengthening in the Americas. We have more people, more coverage, more channels, and we are exposed to more deals. So that altogether I think is gave us very good pipeline and results in Q1. And very good, I would say, outlook for Q2.

Okay. Thank you.

Ittai Kidron.

Roy, I wanted to talk to you about the competitive environment. You know, ACE reported last night, and the outlook for them for June wasn't all that exciting, as well.

And that said, you look at Citrix, and their net scale of business seems to be up 40% to 50% on a year-over-year basis. So is there anything that you're seeing out there competitively that could explain this discrepancy? And also, can you comment about the Cisco areas? You haven't mentioned that at all in your remarks. Is that not an opportunity for you?

Okay. So first, regarding Citrix, we don't see them much in the market. Regarding the growth rates, I think they have done a large acquisition of Byte mobile. So I think you compare apples-to-apples in terms of numbers.

I don't think the market share is changing dramatically in the last couple of quarters. And especially on the pure plays that are reporting with a lot of clarity on the exact ADC numbers. I think that's the case.

Regarding ACE, we continue to see ACE deals, and as time passes there's more and more customers of ACE that are coming into the projects. I don't see that as a hockey stick revenue accelerator. The ACE customer base was -- for the last four years, Cisco was losing share and continues to lose share.

I don't see that as a one-quarter or two-quarter phenomena. We continue to see more and more deals. We had some success in the past quarter in a couple of additional carriers that are starting to replace their Cisco ACE platforms with our Alteon VX multi-tenant switches. And we believe we will continue to win more and more Cisco accounts. But I don't see that as a one-time accelerator for the market.

Okay. And regarding Juniper and Check Point, can you talk about the performance of those two partners in the quarter? And how is the pipeline for those two looking into next?

On Juniper, I don't have any real news to report. Nothing of significance.

On Check Point we continue to see growth. In with the pipeline this past quarter they started to book the first deals that they won, and we are very optimistic that this quarter they will outgrow that. So I think the level of activity, the level of pipeline and customers in the Check Point relationship is very encouraging.

Very good. All right. Good luck, guys.

Thank you.

Joseph Wolf.

I want to first ask about the share buyback in terms of timing. Any end date on that? Whether it's starting it right away -- and I guess even if the current or the Q2 guidance for EPS includes a reduced share count. That's my first question.

Okay. The terms and conditions for the buyback is set by the Board. And of course, we don't share it with the market in this stage.

We have taken the share count some -- small number of buyback that we are going to do in Q2, the second quarter. But again, this number is not going to be shared with the market, for reasons that you can imagine.

Okay, but is it like a two-year plan?

No, this is one-year plan.

It's a one-year plan, okay. My second question is about the mix. If you look at the strength in the US and the comments about the carrier and the security, is it safe to say that those two businesses are different in terms of the mix of the rest of the business? So if it was 30%-70%, is it 40%-60% in the US, or 50%-50%? And the same -- I guess the same question would be with relation to the mix of security versus core ADC business.

I think in the Americas the enterprise business was actually very strong in Q1 as well. So I would not focus the strength of the Americas solely on carrier execution. We see strong trends across all the market. Carriers in general performed well for the Company.

And in terms of the products segment, I think it's more vertical approach. Because in the US, if you ask about US financial services, I can say, yes, security is more dominant there then we usually see in other areas. But if you look at the US enterprise as a whole, excluding security, you're going to -- excluding financial services, you're going to see the regular trends. In manufacturing, in retail, we see the lion's share of our business comes from ADC.

In the carriers it's more lumpy depending on the projects that we win. But across the Americas until now, our biggest share of the business is the ADC.

Okay. And then just finally, is there a difference between product and services as you look at the relatively flat performance for the second quarter as well as year on year?

We don't break it for product and services, but we believe in 2012 our products have outgrown the services, if you look on our 20-F report. We think that this year, we will have -- as a whole we will have a more balanced growth between the two.

We think we can improve. And that was an area of discussion last year. We think we can improve our growth rates in services, and that in turn hopefully help us in the growth rates for 2013.

All right. Great. Thank you.

Rohit Chopra.

Roy, just wanted to ask you something about large opportunities. We keep getting feedback from the field that you're working on a lot of large opportunities. I thought maybe you could talk a little bit about where they are concentrated, both in North America and in Europe.

And then maybe you could talk a little bit about the strength in North America again. What is -- what's driving the success? Because it looks like there is something that you're doing here maybe that's not working anywhere else -- but there's something you are doing here that's actually driving a little bit of growth. I know there's a little bit of a promotion going on on some Alteon products, but if you could talk a little bit about what is driving the strength in North America.

Okay. In general, regarding North America, we think that the growth is coming from several areas. Number one, we are investing more in that market, and we have increased our coverage. So we are exposed to more customers, more deals.

And as we've noted many times, we believe we have the leading product and solution offering in the market. So given the opportunity and the customer ready to evaluate market for solutions, we feel very strongly on our probability of winning that deal. So simply by getting exposed to more customers and expanding our reach, we are seeing growth.

Number two, the US is leading in the adoption of cloud computing, virtual data centers, and recently also in cybersecurity. Those are the areas that we excel in. So there is a good correlation between where the market is heading and investing and where our solutions are excelling.

And as a result, we are seeing increase. And the increase in these markets is also increasing large deals that you alluded to in the first part of your question.

So going out into the large deals, we are seeing very large opportunities -- in larger terms, which means multiple orders of about $1 million per quarter. Those deals are obviously very long in terms of sales cycle, but we're definitely seeing an increasing amount of these opportunities.

And also in what I would vaguely refer to as the quality of these opportunities, meaning more types of customers are we dealing with. It is really the top tier of the carriers, government agencies, financial services, online companies? And I feel the answer is positive to that. So we are very optimistic on the long term, and especially on our ability to penetrate strategically such accounts.

But the things (technical difficulty) guidance yet.

Right, just one follow-up to that. On some of these large deals, are you displacing anybody, or are these new opportunities? Thanks.

In large customers there is generally an incumbent. So either they give you the new type of business -- for example, they continue to use the incumbent for legacy, ADC appliances, and they give you the cloud -- private cloud or hybrid cloud initiative. Or in security, they might have security vendors, but they find them -- they find the coverage inadequate to the current threat landscape. And then they need to add you to the mix. Those are the two main drivers.

In the large accounts they generally don't replace the legacy installations, because they just let that infrastructure age out, and they migrate to new type of infrastructure. So if you take a carrier, people are investing in LTE infrastructures. They will not generally replace in 2G and 3G.

Thanks, Roy.

Rajesh Ghai.

I had a questioned on the Strangeloop acquisition. Do you have any revenue baked into your guide from that acquisition? And now that you've owned that asset for about a month, what do you think of outlook for the rest of the year?

So currently very little. And it's based on our expectation when we did the acquisition. We think that the real revenues will ramp when we will -- towards the end of the year provide an integrated solution to our Alteon ADC. That was our guidance from the start.

We do believe that some of the cloud computing, major hosting, content delivery networks -- and of course, the retail segment, the online segment -- are very, very nice segments to use this technology. And we're starting to develop the pipeline. But again, it was a technology acquisition that we plan to integrate into our ADC and bring a new competitive advantage to the ADC market as a whole.

Okay. I just wanted to follow up on the North American strength question. Is that strength more on the security side or on the ADC side? And in general, did security once again grow faster than ADC this quarter?

In Americas, as I've mentioned, in the financial services segment -- yes, security is the lion's share of our business. And given the current threat landscape I think this will continue to be. In general, our ADC -- the ADC is leading our business in the Americas.

And you talked of the Check Point pipeline being strong going into Q2. How do you handicap the probability of seeing any material traction from Check Point in Q2? And is Juniper not going to contribute at all in Q2? Is that's what you are telling us on the call?

Regarding Check Point, we have some forecasts they provide us every quarter. And we are working by that. I do believe that they are accelerating, and we might see continued growth throughout the year. And in general, we are very happy with the way the relationship is going and developing and expanding.

Regarding Juniper, there's not enough traction that we can see in the market for the joint solution, and we don't see them pushing a lot of value-added services. I don't think it's limited to ADC -- but value-added services on top of the routing platforms to carriers.

We do have some large tier-one wins with them that we believe we are going to recognize more revenue from these wins throughout the year. But I cannot say that my view on the revenue contribution from Juniper is that it's going to expand. It is lumpy, and the exposure currently, in our view, is limited.

And last question on IBM, so at a dinner event sponsored by IBM recently in OpenDaylight, and the speaker mentioned working closely with Radware. Can you tell us what specifically you are working on? Is the DefenseFlow app that you just recently announced? And what could be the timing of any revenue that is recognized from IBM to develop your systems or this OpenDaylight collaboration? Thank you.

I don't want to speak specifically on IBM, because we didn't announce any commercial agreement between the companies. It's more of a marketing and such initiative. So when we will have something to announce about commercial agreements, I will discuss it at length.

Regarding the OpenDaylight, OpenDaylight is one of the -- I would not go into many details -- but it's one of the future developments around SDN that we are engaged in. In the last OpenFlow summit we also demonstrated and announced about DefenseFlow.

And as I mentioned in my prepared remarks, we see SDN and OpenFlow as a major opportunity going forward. Because security acceleration, application delivery will be obviously needed in every featured datacenter. And on top of OpenFlow, with/without Daylight -- OpenDaylight type of controller, we are able to give those values, give those benefits of better availability, better performance, better security to the whole network and data center architecture.

So we are working on multiple avenues in regards to SDN. I have mentioned Mellanox with OpenFlow cards in my call. You have mentioned Daylight, OpenDaylight, which is another. And there's a couple of other passives that we are working on in regards to SDN.

All right. Think you.

(Operator Instructions). Alex Henderson, Needham & Company.

Just a quick one. The acquisition-related expenses on the reconciliation page, what line items is that coming out of?

Yes, the operating expenses, you mean.

It says acquisition-related expenses in the reconciliation to non-GAAP.

Okay, I understand. This line, this is in the G&A usually, which is included all the costs that are associated to the transaction that we had to pay.

Okay, so it's all in G&A?

Yes.

Okay, thanks. That's all I had.

Thank you. And there are no further questions in queue. Please continue.

Well, thank you everyone for joining us today, and we look forward to meeting you on analyst day. Thank you.

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