Radware Ltd (RDWR) 2013 Q4 法說會逐字稿

Welcome to the Q4 2013 earnings conference call. At this time all participants are in a listen-only mode.(Operator Instructions). As a reminder today's conference call will be recorded.

I would now like to turn the conference over to our host and facilitator as well as your President and CEO, Mr. Roy Zisapel. Please go ahead, sir.

Thank you. Good morning, everyone and welcome to Radware's fourth-quarter 2013 earnings conference call.

Joining me today is Meir Moshe, our Chief Financial Officer. We'll start the call by reviewing the financial results and afterwards I'll discuss the business highlights of the fourth-quarter results.

After my comments we'll open the discussion for Q&A. Meir?

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

During the course 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 of our products, the timing and amount of orders, and other risks differ 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 S filed in March, 2013.

And now, ladies and gentlemen, for the financials. We are very pleased to report an additional record quarter and additional an record year of revenues.

Revenues for the fourth-quarter results were a record of $53 million, representing 10.4% sequential growth and 6.4% year over year. Revenues for 2013 total to a record of $193 million, an increase of 2% compared to revenues of $189 million in 2012. In addition the sales revenues increased in 2013 by $6 million dollars.

Non-GAAP gross margin remained at 82% in the fourth quarter as well as for the whole 2013. The non-GAAP net income this quarter was $10.1 million, or $0.22 per diluted share compared to net income of $11.2 million, or $0.24 per share in the fourth quarter last year. The non-GAAP net income for 2013 was $32 million, or $0.69 per diluted share compared to a net income of $40.5 million, or $0.87 per share in 2012.

Stock-based compensation expenses in the amount of $1.6 million, amortization of intangible assets in the amount of $800,000, litigation costs associated with IP litigation in the amount of $1.7 million, and exchange rate expenses in the amount of $250,000 bring the GAAP net income this quarter to $5.7 million, or $0.12 per diluted share compared to a net profit of $9.1 million, or $0.20 per share in the fourth quarter of 2012. Non-GAAP operating expenses reached $33.8 million in the fourth quarter bringing our non-GAAP operating margin to 18.3%.

The headcount for the end of this quarter was 854 employees. Net cash provided by operating activities for the December quarter is $20 million.

That our overall cash position including cash short-term and long-term bank deposits and multiple securities amounted to $286 million and we have no debt. Shareholders equity amounted to $294 million.

Guidance for the first quarter. We expect revenues to range between $49 million to $51 million. 82% gross margin.

Operating expenses will range between $33.4 million to $33.7 million. Approximately $400,000 of it are due to exchange rate, weakening of the US dollar versus both the Euro and the Israeli shekel.

Financial income at $1.3 million. Tax rate at 12%. This is up from 9% last year due to the change of the Israeli tax code.

Share count, 47 million shares, and non-GAAP EPS to range between $0.15 to $0.18. As you can see, ladies and gentlemen, revenues are up, profitability continues to improve, cash is up, the sales revenue is increased, and we expect higher and better results in 2014. And now I would like to turn the call over to Roy.

Thank you, Meir. We are very pleased with the results of our fourth quarter both in record revenues and coming in above our expectations.

The North American market continues to grow significantly for us. Given the market data it's obvious that we are gaining substantial market share in the US.

In addition, we witnessed good recovery in EMEA. We are optimistic about our progress in this geography and believe we are now positioned to grow revenues again in this market. Regarding the overall market situation, we continue to see significant application delivery activity worldwide in private and hybrid cloud data centers, data center consolidation projects and Cisco ACE replacements.

In the past quarter we saw very strong year-over-year growth in ADC bookings, the strongest we had in a couple of years. In addition, there is significant increasing demand in pipeline for our cyber security solutions given the ongoing waves of attack from financial institutes, government agencies and online businesses.

We believe these two growth solutions are expanding other addressable market from traditional load-balancing and application delivery use cases to becoming the control plane and a critical component in enterprise data centers and carrier infrastructures. Adding to that with new opportunities in SDN and NSV, we are confident in our ability to accelerate growth of our business and to become a strategic player in carrier and in enterprise IT transformation.

As part of our increased involvement in SDN, we joined the Open Networking Foundation Northbound Interface Working Group. Charted in October, the NBI working group was created to standardize the API between applications and SDN controllers and help application developers actively seek an open API to develop code for the SDN framework. It will enable acceleration of SDN innovation by allowing necessary application portability across SDN controllers both open-source and proprietary.

From a product point of view we had significant product announcements last quarter on the ADC side. For the cloud we expanded the form factors that our Alteon ADCs support to now also include the Amazon AWS cloud. Customers can now run the same Alteon ADC services in their private data centers and in the Amazon cloud and enjoy global traffic management in hybrid cloud capabilities between AWS and their own enterprise data center.

Most significant, is the Alteon Next-Generation launch. Unlike legacy ADCs that offer a best effort approach and share resources across all applications and users approaching the application farms, a Next-Generation ADC is an ADC that can ensure application SLA.

Alteon NG is the industry only ADC built from the ground up to provide this capability. We can provide full application SLA assurance by offering the dedicated ADC virtual instance, per application with complete isolation between instances, which will not impact neighboring application performance.

Additionally, Alteon NG offers on-demand scaling up without hardware modifications and best-in-class application acceleration features, with the ability to maintain application SLA's even under attack. Alteon NG also provides real-time tracking of application SLA's and can measure real user transactions including errors with application performance monitoring.

This capability permits the quick detection of performance problems across the network and the data center to exactly pinpoint SLA issues. We believe this is a very unique differentiation and competitive advantage in the market and one that is becoming more and more critical as enterprises and carriers moved to shared infrastructures such as the cloud, while faced with the critical need to guarantee and improved application SLAs.

Expanding on our transaction acceleration capabilities, in the market research we conducted titled State of the Union E-commerce Page Speed and Web Performance for Fall 2013 we discovered that websites for the top 500 US retailers are still too slow and continue to get slower. In fact, web pages have slowed down 14% since the summer of 2013 and are 16% slower than fall of 2012.

Additionally, the report uncovers inconsistent adoption of core best practices by site owners critically affecting website performance and customer experience. If the trend towards bigger, slower pages continues it is clear that our fast reacceleration capabilities are critical to improving customer satisfaction and business conversion for more and more enterprises around the world.

All these product advancements and competitive differentiators were also highlighted in the Gartner ADC Magic Quadrant recently published, which positioned Radware as the leader for the fifth time. Per Gartner, Radware provides the most flexible set of architectural features as part of its VADI architecture. VADI provides scale-up, pay as you grow, scale-in, device consolidation via multitenancy and scale-out via clustering.

Radware FastView, per Gartner, provides the deepest set of acceleration capabilities in the market. It also includes integrated security, APM, and service-level agreement monitoring capabilities within it ADC product line. And, per Gartner, is an active participant in a number of SDN ecosystems, Radware is well-positioned in SDN, NSV and network utilization achieving quick mainstream adoption.

To summarize, we are seeing strong momentum in the application delivery and cyber security markets and believe they can provide us with ample growth opportunities in 2014 as Radware returns to double-digit growth. Before concluding I would like to thank our customers and partners for their continued support and trust.

I would also 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.

Alex Henderson, Needham.

Didn't hear the geographic split. Could you give us that?

Geographic split for Q4 it was US 36%, EMEA 35% and Asia-Pac 29%.

Second question, I heard in doing our fieldwork that the orders in the field had actually accelerated over the course of the quarter. We are seeing a linearity that's a little bit discontinuitous with historical patterns, IE. very strong orders in the last month. Is that an accurate read of what you guy saw?

It's different for us. We did see a strong booking in the last months of the quarter but it was generally trending in Radware that the last month is anywhere between 50% to sometimes 60% of total revenue. So I don't think we've witnessed something special; actually, we were quite pleased with the linearity.

And then can you talk a little bit about what you think is going to happen with respect to pricing? I know that last year due to the pricing structure of the five products when they launched them back in late in the fourth quarter of 2012 and into the first quarter that that put pricing pressure on the category in 2013.

What do you think that looks like as we go into to 2014? Are we going to see a more mundane pricing environment or do you think there's another catalyst to move prices lower?

I don't think there's a catalyst to move it lower, and as we discussed in the last several calls we believe that it's more of a step function than a continuous price reduction and we don't see pricing changes. And as a result we believe some of the comps for the categories going into the first half of next year will probably be easier and then the market will see again ADC growth in total market size, also.

Great. Thanks, I'll cede the floor.

Michael Kim, Imperial capital.

Can you talk a little bit about Attack Mitigation, are you continuing to see an increase in adoption by larger enterprises for the hybrid cloud infrastructure and maybe you can comment on recurring revenue and booking's growth?

Okay, so absolutely we do see continuous penetration in the high-end and overall the year was very strong in Attack Mitigation. And regarding the hybrid solution, we do see an obvious growth in the deferred billing.

So contracts that our multiyear, those are billed anywhere from monthly to yearly and as they are getting billed we are recognizing them. But in the booking side we absolutely see growth in the hybrid cloud business.

And could you also provide an update on DefenseFlow. I think last quarter you talked about some issues with a Tier 1 carrier in the US. Are you starting to see wider adoption for DefenseFlow?

We are starting to see -- we see also a lot of partnerships around it. This week in Cisco Live in Milan we are again presenting that together with Cisco.

So obviously we're we think that's the first and only to date SDN application in the market and we see a lot of interest. SDN deployments are still in very early stage. They are mainly in labs and user trials in a limited fashion but we do believe it gets us designed into next-generation networks and appointments, and that's the importance of DefenseFlow.

In addition to that it obviously carries a lot of our other products with it. The specialty DefenseFlow but sometimes, also, the rest of our portfolio.

And then lastly just on a geographic basis, are you seeing the level of activity insecurity in the EMEA region starting to converge with the type of the level of activity you've seen in North America especially with larger enterprises and carriers?

Not yet to the same extent but I think in the last two quarters we do see a pickup in the amount of projects in Attack Mitigation in EMEA, mainly around carriers and large enterprises, as you have mentioned, and quite a good openness and adoption of hybrid cloud. So I think we're still there in early days, if it will pick up like it picked up in the Americas it's obviously a major growth driver for us but I think it's a bit too early to tell yet.

Okay. Great, thank you very much.

Joseph Wolf, Barclays.

Hi, this is Tavy Rosner on behalf of Joe Wolf. I was wondering if you could give us the mix of product versus services for the quarter?

Usually what we do, we give it for the year and we'll announce it while announcing the annual report scheduled for March.

Okay, thanks. I was wondering could you comment on the (technical difficulty) end for new products in bundling, meaning what percentage of customer actually buying multiple product.

We don't have this statistic handy now for the call. But, in general, with Alteon NG and the complete Attack Mitigation solution, which is multiple products, it encompasses the DefenseFlow for blocking the network and application DDoS. It includes the AppWall for the web layer attacks and Alteon for the SSL attacks.

We do see more and more customers in dramatically higher numbers that we've seen before purchasing more than one product line and start of a complete solution. We are also trying to cross sell the solutions meaning ADC solution and AMS solution and we believe that Alteon NG where one of the key capabilities is its ability to signal the attack to our hybrid cloud.

So whenever we detect in attack today in the server farm the signal can go all the way to the DefensePro at the edge of the data center or to the cloud to mitigate the attack. We believe that these capabilities that bring together the different solutions we have will increase that cross selling even further.

Understood, and maybe one last one from me. Can you share with us your hiring plan for next year maybe by either region or end market?

So, our plan is to continue to increase our investment. The investments are primarily going to regions that are growing.

So two additional sales teams. And so obviously in the Americas that we believe given the recent results for EMEA. And in R&D we continue to ramp up investments in the solutions we have, and especially cyber security, cloud application delivery are the core investment areas for us.

Thank you.

Jess Lubert, Wells Fargo Securities.

Got a couple questions here actually. Maybe first off I was hoping you could talk a little bit about demand trends in Asia.

It looks like the business was fairly weak there in the quarter. Can you talk about what you're seeing just from a regional demand perspective and to what degree you're expecting any improvement in Asia in the upcoming year?

Okay, last quarter, you're absolutely right, Asia-Pac was our least-performing region. We are doing some adjustments there to our sales management in the region especially on the country, on some of the specific countries level.

The main weakness we saw I think came from China and some large projects we were not able to bring in. Our expectation is to see growth in Asia-Pac this year but given the latest performance we will be more conservative on that.

In general I'm not sure it's an overall market issue. I think we need to improve our execution and we've seen that in other regions that we can achieve that in a relatively short time.

Okay, and have you made some of these changes? Are the new people in place?

Are there reasons to think that we could see a similar result in Asia as to what we saw in Europe in 2014 and would it be right to think that the return to growth is more of a second-half phenomenon in 2014?

To be conservative we will take it at second half but some of the new people are already in place.

And then it seems like operating margins are going to dip down in Q1 and you're going to be investing in sales and marketing and R&D in the upcoming year. On the last call you talked about possibly getting to a 20% operating margin by the end of the year.

Is that still a realistic objective you think you can hit? Is it stretch call? Any kind of input there?

You can see the difference from Q3 to Q4 this year, that in one quarter actually we increased operating margin more than 3%, more than full 3 points. So we are very sensitive to the top line.

It's all what we discussed in this call is going to happen so I don't see not reaching the 20% in Q4. But again it's due to the fact that we will be able to achieve the growth that we are expecting.

At the same time take into consideration that we also increase investment. So we are very sensitive to the top line, we would like to achieve that one, but it depends on our ability to achieve growth in the year specifically in the second half.

Okay, and just the last one for me. Did the Company buy any stock in the quarter, and can you update us where you are with respect to the buyback?

Yes, actually we bought back shares $8 million, 537,000 shares for $8 million. We have still on the plan $32 million.

Great. Thanks, guys.

Rohit Chopra, Wedbush.

Three questions here. Roy, can you just talk about partner revenue, your OEM partner revenue? Where do you see that going?

Is that increasing this past quarter and where do you see it going for the upcoming year? Meir, Can you also give us the enterprise service provider split and can you talk about DoS sizes, how those are trending as well?

OEM revenues went up. Some of our key partners were, and specifically Check Point, where in record result for us and we do forecast that that will increase also in 2014. So all in all we were quite satisfied with our OEM revenue.

Okay, about the space between enterprise and carriers, carriers this quarter were 32% of the overall business, 68% was the enterprise. At the same time we see an increase in our leverage deal from $120,000 last quarter to about $130,000 this quarter.

And just to follow up on what Meir mention, the increase is coming as we're seeing customers taking in the carrier side our bigger solutions, bigger platforms mainly the 6420 that we released in Q3. It's becoming a very popular platform.

And on the security side we're seeing them taking a complete Attack Mitigation Solution including the cloud, which increases DoS sizes by around 50% including the web application tier and the SSL tier. So this cross selling together with the move to higher performing, higher bandwidth platforms is driving average deal sizes up.

Roy, actually a quick follow-up on the service provider. Is what you saw in Q4 more of a budget flush end-of-year spending by service providers, or are you seeing follow through as we move into 2014?

I think it's continuous. Actually some of our -- I think a couple of our top service providers already purchased additional project from us in January.

So I don't think we've seen, at least as it relates to our business, we didn't see a budget flush. We are seeing strategic projects like cloud, like cyber security continue to be rolled out and installed.

It's more US or Europe or is it both?

It's both.

Thank you.

Alex Henderson, Needham.

Just wanted to go back to the virtualization piece for a second. Could you talk a little bit about what portion of your business is being driven by the virtualized elements of your ADC line, what the licensing looks like in the installed base and current shipments as a percentage of ADCs?

Okay, so today every ADC appliance we ship, meaning only the software ADCs, are not shipped with virtualization built in. And software ADCs our customers just buy the instance.

So every project that we're doing is based on these virtualized ADC concept where each application has its own instance, each business unit has its own instance supporting consolidation and virtualization. We've seen in Q4 a record revenue from virtual licenses, so beyond the fact that we ship the devices with built-in virtualization capabilities we are seeing the most licenses and instances being bought, very strong growth for us and we clearly believe that with the Alteon NG launch it will strengthen this trend.

Can you give us any quantification around that? The licenses grew faster than overall revenues, the licenses relative to the units shipped, can you give us what portion actually turned on additional licenses as opposed to just using the existing two licenses? Any metrics along those lines?

So it's two licenses on the low-end and we've increased the licenses on the high-end to five in the base platform. I don't have the quantified number but it grew faster than the sales, obviously.

If you go back to my comments we had a very strong ADC booking result this quarter, double-digit growth bigger than everything we've experienced in the past two years. And that's due mainly to the virtualization, the VADI concept and all these multiple instances, multitenancy deployments.

Going back to the enterprise piece of your business, the split that you've provided, 68%/32% implies that the year-over-year change in the enterprise is essentially flat. Obviously that's better than down 4% last quarter and improving, but can you give us some thoughts on how you think that that is going to change over time and whether there was some pent-up demand in that?

How do we think about that? Is there any differences in geographies on there? Give us a little bit more color around that.

I think some of this weakness is to some extent correlated to Asia-Pacific weakness. I think overall I do believe that enterprise will improve in 2014 as the ADC market also in terms of growth is accelerating.

Insecurity we have a more balance between carrier and enterprise than in ADC. I think you're seeing here the Asia-Pacific plus the fact that the ADC had a tough year in 2013.

And on the security side, could you provide is at least with the growth rate even though you don't talk about the actual size of it, can you give us a growth rate on the security portion?

I think we can, but we are not providing this data on the call. I apologize, Alex. And there is a reason for that.

In the ADC, also in terms of our competition, none of the market players today are splitting security and ADC, and there's more and more overlap also between the ADC functionality and the security functionality. So I believe for our competitors it's even a single product line and for us I think we want to keep it as is.

Okay, I'll cede the floor, thanks.

Jess Lubert, Wells Fargo Securities.

Just had a question on the balance sheet for Meir, the deferred revenue and other payables, it looks like it actually declined sequentially. I guess I was just hoping you could tell us what the trend was just in deferred on its own and if that was down sequentially, and if so what drove that or were the deferred trends on a standalone basis actually a little bit better?

Actually the sales revenue we have two lines for that. On the account liabilities and a long-term liabilities, you have to read them together.

On the long-term liabilities the deferred revenues increased by $4 million. On the current liabilities it was increased over $2 million. So altogether the sales revenues, as I mentioned in my discussion, went up this year over $6 million.

Yes, but on a sequential basis can you share with us how they trended?

Yes, we don't split it on quarterly basis but also on the quarter it went up. The quarter it also went up.

All right. Thanks, guys.

There are no further questions in the queue at this time.

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

Ladies and gentlemen that does conclude our conference call for today. On behalf of today's panel I would like to thank you for your participation and thank you for using AT&T.

Have a wonderful day. You may now disconnect.