Radware Ltd (RDWR) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Radware third-quarter 2013 earnings conference call. At this time all lines 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). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Roy Zisapel. Please go ahead.

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

Thank you, Roy, and welcome, everyone, to our third-quarter conference call. First I would like to review the Safe Harbor language. During the course of this conference call we 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 our products, the timing and amount of orders and other risks detailed from time to time in Radware's filings.

We refer you to the 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 2013. And now, ladies and gentlemen, for the financials.

Revenues for the third quarter totaled to an amount of $48 million, compared to revenues of $46.8 million in the second quarter of 2013 representing 3% sequential growth and 1% increase year-over-year.

The non-GAAP gross margin remained at 82%. The non-GAAP net income this quarter totaled to an amount of $7.8 million or $0.17 per diluted share compared to net income of $7.1 million or $0.15 per diluted share in the second quarter of 2013.

Stock-based compensation expenses in the amount of $1.3 million; amortization of intangible assets in the amount of $800,000; litigation costs and professional services associated with IP litigation in an amount of $1.8 million; tax expenses related to settlement with the tax authorities in regards to [file] years in the amount of $800,000; and exchange rates expenses in the amount of $170,000 brings the GAAP net income this quarter to $2.9 million or $0.06 per share compared to a net income of $8.2 million or $0.18 per share in the third quarter last year.

Non-GAAP operating expenses reached $32.2 million this quarter and non-GAAP operating margin increased from 14% in the first half of the year to 15% in the third quarter.

The headcount for the end of this quarter was 832 employees. Cash position, including cash, short-term and long-term bank deposits and marketable securities, amounted to $271 million and we have no debt. Shareholder's equity amounted to $289 million.

Guidance for the fourth quarter. We expect revenues to range between $49.5 million to $51 million; 82% gross margin; OpEx will range between $32.8 million to $33.3 million; financial income at $1.25 million; and non-GAAP EPS to range between $0.18 to $0.19.

To summarize, in the third quarter of 2013 we returned to growth and we continue to see strong market need for our type of products. In the next quarter we believe we can increase our growth rate as well as increasing our profitability. And now I would like to turn the call over to Roy.

Thank you, Meir. We are pleased with our third-quarter results demonstrating solid execution amid a challenging economic environment. We believe we made substantial progress on getting the business back to growth.

Of special note is our continued product revenue growth and in particular growth in North America. We were able once again, to grow our market share in the Americas as we have done the past two years. Consistent with prior quarters the growth in North America is well balanced across enterprise customers and specifically the financial segment, online and carriers.

Our focus on the data center market for both application delivery and application security is paying off with these customers. Furthermore, our innovation is focused on private and public cloud, cyber security and software defined architectures where we see strong activity and interest from these types of customers who are technology savvy and early adopters.

Speaking on SDN, we (technical difficulty) this past quarter our DefenseFlow product. DefenseFlow is an SDN application that programs SDN enabled networks to become part of the denial of service protection service itself. With DefenseFlow operators can assign a DoS protection service for virtual network segment or per customer. This allows network wide detection of cyber attacks with very specific diversion of suspicious traffic to scrubbing centers for mitigation.

At a recent Cisco live event in Orlando we demoed the DefenseFlow product using the Cisco XNCSDN controller and Cisco (inaudible) to provide DoS protection as a native network service. We believe this SDN architecture for security has unique benefits over legacy architectures and are happy to report that we received an initial order from a US Tier 1 carrier for this solution. We believe it is the first implementation in the industry of an SDN security application underscoring the innovation and leadership we have in this space.

Continuing with our attack mitigation solution we continue to see a rapid increase in the number of attack incidents across the world and the sophistication of tools and methods hackers are using to undermine the availability of mission-critical infrastructures.

Our attack mitigation system was built with the sole purpose of protecting our customers against any type of cyber attack. Our AMS is a market leading solution that uniquely integrates denial of service protection, intrusion prevention, network behavioral analysis, anti scanning, web application firewall and a security event manager for real-time protection against cyber threats.

We have seen more and more activity from carriers and cloud and hosting companies looking to secure their infrastructure and provide managed security services to their customers. A recent win we announced last quarter is Brinkster.

Brinkster, a cloud and hosting provider based in Phoenix, introduced an attack mitigation service to all their customers which is based on our hybrid solution. By securing their customers, Brinkster was able to increase their output and achieve a very compelling ROI for four months (inaudible) solution. We feel very optimistic in our ability to grow share in this vertical given our superior solution, our hybrid cloud architecture and our increased footprint on the enterprise customer side.

On previous calls we discussed our cloud delivery business model. We are happy to report growth in our attack mitigation cloud services booking with large enterprises adopting our hybrid cloud solution. We see cloud contract lengths of one to three years. And also these bookings are not translating to immediate revenue, they provide us with better visibility for the coming quarters as well as annuity revenues.

Continuing on the cloud business front, we also see ongoing growth in our cloud acceleration services either through our FastView cloud offering or through our content delivery network partners. We are seeing more and more retailers taking advantage of the cloud business model to dramatically accelerate their sites to provide better user experience and increased conversion rates for their business.

We've released during the quarter a new study by the state of the union e-commerce page speed and Web performance. Now in its fifth edition the study revealed that websites for the top 500 US retailers continue to slow down with almost a 14% drop since spring of 2012. Additionally the report revealed that the median time to interact, or TTI, is 4.9 seconds.

TTI is the point at which a page displays its primary interactive content; for example, a feature banner with a call to action. Of the top 100 e-commerce sites tested only 8% of the top 100 sites has sub 2 second TTI, while 9% had a TTI time of 8 or more seconds.

Our FastView product supported by third-party testing and analyst reviews is the leading solution to accelerate Web applications and specifically for delivering applications to mobile devices. Coupled with FastView we provide our customers with our 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 user location. We have received strong positive feedback from our customers for these capabilities and believe they will expand our addressable share of wallet in enterprise and carrier data centers.

To summarize, today we have a leadership position in the market which relates to our product and solution offering. We have introduced key innovations into the market specifically around SDN, cloud and cyber security. We are able to grow our North America business consistently and significantly above market and we believe our international business is stabilizing. With these technology, business and market advances we are optimistic on our business growth prospects.

Before concluding I would like to thank our customers and partners for their continuous support and trust and I would like to thank the hardware 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). Ittai Kidron.

Thanks. Meir, Can you give us the geographical mix of the revenue? And Roy, can you talk about Europe specifically, how the turnaround over there is moving along?

Split between regions the US was 41% of our revenues this quarter, EMEA 24% and Asia-Pacific 35%.

Regarding EMEA, we feel that the business is stabilizing, especially you know, I think on the booking side we are doing way better. And we do hope that we'll get the business back to the levels it was previously. So all in all I think we are progressing well and next week we have our EMEA partner event, a (inaudible) with very high attendance rates from the top customers and channel partners. So we are quite optimistic on our progress in EMEA.

Okay. Can you talk about security in general, how as you review this platform you have been doing this quarter, your security solutions overall and also the contribution from Check Point and Juniper in the quarter?

So we do see a lot of activity in security, especially in the North America market. We do believe that we are starting to see more signs of that going into EMEA, especially in the very large enterprises, online and carriers.

In terms of the specific contribution from Juniper and Check Point, we are not breaking it every quarter, but I think we gave last quarter a good indication to where the OEM business is and our expectations forward and so far it is based on our expectations. There is no change there.

Very good. Good luck, guys.

Jess Lubert.

Thanks for taking my question. A couple of questions just to follow up on the previous one. Can you update us on what you are seeing in Asia? The business grew a bit sequentially but did appear to decline on a year-over-year basis. So how are you feeling about this year and how are you thinking about Asia heading into the December period? That is my first one.

I think Asia went down year-over-year, but also very strong quarter we had last year in Q3. All in all I think the business there is stable. There are some countries better than others in the mix there. We do feel there is going to be an improvement in Q4 in the business. Some of the countries there, again, have a strong Q4 like China and some like Japan and India have a strong Q1 finish. But all in all we think we are heading into a good Q4 in Asia.

Okay. And then, Roy, I was hoping you could talk a little bit about the competitive environment. Last quarter you suggested some of F5's new products had changed the pricing dynamics, particularly at the low-end of the market. So I would be interested in getting an update here with respect to what you are seeing versus F5, as well as some of the other players in the market like A10, how you are competing against some of these lower-priced solutions and how your win rates are trending here at this point in time?

I think what happened in the market is that everyone adjusted their prices to the new levels. So I believe at this point all the players are reporting I would say almost back to normal competitive environment. But it looks like we have lowered prices on the low-end.

From a competitive position nothing has changed. Meaning we continue to highlight the fact that we have the most advanced architecture for multi-tenancy, (inaudible) consolidation or ADC virtualization in the market in our VADI. We have the best in the market acceleration that I noted also in my prepared remarks, coupled with the application performance monitoring.

So we think we have a very solid offering for guaranteeing (inaudible) for mission-critical applications and allowing our customers to consolidate and virtualize the ADC in their data center. That continues to be our play, it continues to get very strong feedback from large carriers, large enterprises that really are in the high-end of the market. While at the lower end it's a more price-sensitive environment and we compete like others in that space.

So, I don't think anything has changed in the competitive positioning. I do think, as we have discussed in the last call, that there was a reset of the price level in the low end.

And then just maybe last one for me. Can you give us an update on the Cisco ACE replacement opportunity, how is momentum progressing there and how are you thinking about that business going into Q4 and 2014? Thanks.

We continue to see activity of customers replacing Cisco ACE. As a matter of fact, last quarter we had a large win -- saying large, it is in the magnitude of $1 million in a large bank and in a top North America bank to replace Cisco ACE. So we continue to see customers integrating of that platform, it's a -- I think it's in a steady rate. I don't know for how long this cycle will continue, but it seems there is still a lot of customers out there with aging ACE platforms that are starting cycles.

Alex Henderson.

So can you talk a little bit about the penetration of virtualization? And you have defined that as your cutting-edge advantage in the marketplace. Can you give us some sense of whether there is a change in the rate of adoption or an increase in the percentage of sales that are being driven by that as a determining characteristic, some sort of metrics along that?

So we are still seeing similar trends. One of the things that we do see is that 30% of the customers that are starting with two instances are actually upgrading over time the amount of instances they are using. So we are seeing growth in the consolidation ratios that our customers are doing and using the benefits of the platform.

In a recent discussion with leading analyst firm in the industry they told us that our customers that we present and the use cases that we present are dramatically more consolidated than any other vendor in the market. So the consolidation ratios, the amount of instances that our customers are running is almost an order of magnitude higher than what you are seeing in terms of realized implementations of others.

So, we think that we have something real here and we are pushing it more and more to the large carriers, large cloud providers. And we think that is our entry into competitive accounts.

So, can you talk about what kind of mix you are seeing in terms of appliance-based VM instances versus soft-only-based environments? And are you seeing any shift at all in the customer usage of soft-only type environments, either yours or other vendors?

We don't see a huge shift. We continue to see the vast majority of implementations using hardware based platforms as the base for running those virtual instances on top simply because they need hardware for acceleration or for security and that is not there in a general-purpose server running AVM.

In general, we do see public cloud more appetite for a completely software-based virtual appliance and private ones, more desire for the hardware-based consolidation.

And then last question for me. Can you give us a breakout between enterprise and service provider on the Company's revenues, particularly in the ADC space?

Enterprise was 71% and (inaudible) 29% this quarter.

It is total, it is not only ADC, Alex.

Great. Thanks.

Joseph Wolf.

Thanks. I was hoping you could give us a little bit more flavor on the guidance for the fourth quarter, if you are seeing positive trends, whether it is seasonality and whether it is across some of the new products that you have got or in the core ADC business. And then I was hoping you could go into a little bit more detail on the SDN, the order from the tier 1 in the US, if you could describe the use case for us if it is in the network, if it is a specific test case or how they are using it and what the opportunity for growth there is.

So at this point, we have provided for Q4 for a sequential increase over Q3. We feel there is good momentum in the business, but we want to see that translate into the increased business that we expect. We think you can decide whether it is conservative or not, but we feel comfortable with this guidance.

Regarding SDN, the use case is that they want to provide customer protection. So for key enterprise customers, they want to protect these customers across multiple data centers these customers have using their network and for that, they are using SDN instead of deploying physical appliances in front of each and every customer data center. That is part of the service. They are using SDN connected to our DefenseFlow product to detect any suspicious traffic or attack traffic on these customers. And once detected, our DefenseFlow product controls the open flow switches to divert the suspicious traffic to centers at this point that includes our DefensePro high-end mitigators that scrub the suspicious traffic and inject back the clean traffic to the carrier network.

So you can think about these applications as networkwide. It can be across all of the networks whenever there is open flows switches without having a security device there. You can detect an attack using our DefenseFlow SDN application and once detection has been done, move the traffic to select points of presence where you have a lot of scrubbing and mitigation capability to clean the attack traffic. This service will become a leading production service. You can expect us to grow significantly the revenues from this application as more enterprise customers will sign up for this network protection service.

So are you selling this through the carrier as a subscription or a license as they grow or is it a hardware software sale to the carrier?

It is a hardware software sale to the carrier. The carrier is using that to offer a managed security service to its enterprise customers.

Perfect. Thank you.

Mark Sue.

If I look at your planning assumptions for next year, I guess what would be your key priorities, gentlemen? Will it be as you look to reaccelerate the top line and build on the improving execution? Will it be new product development? Will it be more marketing-focused? Will it be more doubling down on some of the SDN projects with the carriers? Just trying to get a sense of your priorities and how we can build on the revenue growth rate into next year and beyond.

Our number one priority will be to accelerate the growth of the business. It is a combination of increasing the product revenue growth, as well as starting to enjoy some of the services booking that is improving for us and hopefully, we will start to see that impact into next year in our numbers.

In terms of the productline, as I've mentioned in my comments and previous calls, we are focused on developing and releasing new products around SDN, cloud and cyber security. That is where our innovation is going to. That is where we see the biggest opportunity and we are going to -- you are going to see new product releases in these areas.

In terms of sales and marketing, we are going to continue to expand the America coverage. We feel as though we are growing nicely. We are very much underrepresented in the market and we still have a lot of sales teams to add without any overlap to our existing efforts. And around the world, we are going to selectively add resources as the business is improving. So all in all, our number one priority is to re-accelerate the revenue growth and that will be our focus across the whole Company.

If I were to look at some of the lessons learned from your partnerships and your partners this year and what you might do differently next year, how should we think about relationships or more relationships as you expand your routes to market with the Check Points, the IBMs and all the other ones that you have worked on and how they may develop next year?

We think we are very optimistic, as we've mentioned, on the Check Point relationships, continuing to grow and assuming we will finish this year as we believe we should, I think it is a very good starting base for next year and continued growth there. As they are becoming more active, the channels are more knowledgeable and so on. We are working hard to replicate that success with other partners. We continue to believe that OEM and strategic alliances for us is a great way to market. So we continue to work on such initiatives. We are optimistic it will help us next year for the business acceleration as well.

Okay. Thank you, gentlemen. Good luck.

Alex Henderson.

Just a quick follow-up. Can you remind us what your federal exposure is and give us any sense of what you saw within that vertical?

We have very little exposure to federal, so we are not impacted today by the environment there.

Do you have any intentions of building into that space or do you plan to just leave it as is?

We are investing in this space and we are looking to grow it, but it will be an upside to our current business.

And then the sales side in the US, can you update us on where you are in terms of hiring additional salespeople in this geography? I know you had hired pretty aggressively towards the end of last year and into the first half. Can you give us an idea what your expectations are in terms of adding new coverage here?

We continue to do so every quarter and it depends on our ability to find the right talent. But each and every quarter, including already in this quarter, we have added sales teams in the Americas and we will continue to do so.

Okay, thanks.

Rohit Chopra.

Thanks very much. Roy, you mentioned HP and Cisco in your press release and I just want to get a sense are they looking for new partners? Just a little bit of a follow-up on Mark Sue's question. And then for Meir, I just wanted to get a sense on tax rate for next year. I think Check Point talked about a change in the tax rate in Israel for next year. Can you just comment on that?

So regarding the partnership, we think that SDN, cloud and cyber security, those are the most innovative spaces in the industry. There is a lot of partnerships that can be done with various vendors. Specifically for your comments, I think, in SDN, all the networking vendors require applications that will run on top of their open flow switches or overlay architectures. And I think we are today the only ones to provide such applications that are SDN ready and in production. So there is a lot of options for strategic alliances and we are pursuing them.

As for the tax, right now, our tax rate is about 9%. Next year, we estimate it will be in the low teens.

The low teens, okay. And then, Meir, can I ask you a follow-up just on the litigation, so that is new. What is this IP litigation? Who is this with? What is it about?

Actually we filed a lawsuit for patent infringement against two of our competitors.

Okay. Thank you.

Ittai Kidron.

Thanks. Just one last follow-up, with the exception of this year where you had some challenges in Europe, historically, your margins have been about plus, minus a couple percent sequentially from December. Is that the same framework we need to think about as we head into the March 2014 timeframe?

Ittai, let's give something for the December call when we will have a better view and we will provide visibility, but generally speaking Q1 is a seasonally weak quarter for us. I would not expect a sequential increase from Q4. But to be more specific, we need to wait a couple of months and give you more visibility then.

Good luck, guys.

(Operator Instructions). Ryan Bergin.

There has been a thought around a $51 million quarterly revenue run rate at which point you might be able to achieve somewhere around a 20% operating margin, clearly above the midpoint of Q4 guidance. The operating margin is not at that level. Are you still comfortable with that $51 million run rate as the point where you could attain 20% operating margins and if not, what would you be thinking about today?

Actually the high-end guidance, $51 million, is representing 17% of operating margins. Bear in mind that since we enjoyed more than 80% of gross margin, so we are very sensitive to the top line. So you can do the math by yourself, but you can understand that it is not only adding the top line; we also need to add the sources, as Roy mentioned before, hiring people, etc. So the level of say mid-$50 million, $55 million, $56 million, $57 million, it depends on different criteria. It is more accurate (inaudible) 20% operating margins at this stage.

And then I know you're not specifically commenting on either Check Point or Juniper, but I think the Check Point relationship was about a $1 million per quarter run rate last quarter. Can you at least comment on whether or not you are continuing to see momentum in building upon that $1 million run rate?

We don't want to specifically now every quarter start to break it out. But, as we said, we feel good; nothing changed from last quarter. We feel very optimistic and good about the Check Point relationship and we expect it to grow over time.

Thank you.

Joseph Wolf.

I may have missed this. I was just hoping if we could get a follow-up on the services side of the business. You talked about a return to growth given some initiatives at the end of last year and this year and wondering if you are still on track for a 20% growth in the core services business this year.

We think so. We are relating, of course, to bookings, but yes.

Perfect. Thank you.

(Operator Instructions). Allowing a few moments, I am showing no other questions in queue at this time. Please continue.

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

Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may disconnect.