Radware Ltd (RDWR) 2015 Q2 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by. Welcome to the Radware Quarter Two 2015 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, President and CEO of Radware, Mr. Roy Zisapel. Please go ahead.

Thank you. Good morning everyone and welcome to Radware second quarter 2015 earnings conference call. With me today is Meir Moshe, who as we announced earlier this month is stepping and Doron Abramovitch, our new CFO. Meir will start the call by reviewing the financial results and afterwards I'll discuss the business highlights of the second quarter results.

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

Thank you, all 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 time and the 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 Security and Exchange Commission, specifically the Company's last Form 20-F filed on April 27, 2015.

And now ladies and gentlemen for the financials. Revenues for the second quarter totaled $56 million representing 6% year-over-year growth. Non-GAAP gross margin increased to 83.3%. The non-GAAP net income this quarter was $10.8 million or $0.23 per diluted share compared to net income of $8.2 million or $0.18 per share in the second quarter of 2014.

GAAP income, $2.4 million of stock-based compensation expenses, $300,000 of amortization of intangible assets, $1 million of litigation costs associated with IP litigation offset by exchange rate income of $100,000 bringing GAAP net income this quarter to $7.2 million or $0.15 per share compared to net income of $3.9 million or $0.08 per diluted share in the second quarter of 2014.

Non-GAAP operating expenses reached $34.4 million in the second quarter, bringing our non-GAAP operating margin to 20%. The headcount for the end of this quarter was 957 employees. In the second quarter, the Company generated cash in the amount of $19 million. Thus our overall cash position, including cash, short-term and long-term bank deposits and marketable securities, amounted to $341 million and we have no debt. Shareholders' equity amounted to $344 million.

The revenue split between regions this quarter; America accounted for 43% of total sales this quarter, representing 16% year-over-year growth; EMEA, 28% of total sales this quarter, representing 18% year-over-year growth; and APAC, 29% of total sales this quarter, representing a decline of 15% year-over-year. Revenue split between carrier and enterprise, enterprise contributed 71% of revenues and carrier 29%.

Guidance for the third quarter; we expect revenues to range between $57 million to $59 million, 83% gross margin, OpEx will range between $36.4 million to $37.2 million, financial income at $1.4 million, 14% tax rate, share count 47 million shares and non-GAAP EPS to range between $0.23 to $0.24.

Before I turn the call over to Roy, as we announced earlier this month, I decided after more than 16 years of 64 quarters to step down. I want to say that I am proud to have been part of the Company's achievements. I joined the Company in June 1999, before its IPO, when headcount was 40 employees and I leave the Company when headcount is nearly 1,000 employees. Radware is strong financially and operationally and at an extremely exciting time in its development. I'm very confident that Radware will continue to deliver value for shareholders and customer alike.

I would like to thank our investors and analysts for your support. It was a great opportunity to work with you during the time here at Radware. I would like to thank all Radware employees and specifically my team. Ladies and gentlemen, please join me and welcome Radware's new CFO, Doron Abramovitch.

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

Thank you, Meir. We had mixed results for the second quarter with revenues coming in below our expectations. We experienced our biggest challenge in the Asia Pacific region where sales declined 15% year over year. Conversely EMEA grew 18% and Americas grew 16%, continuing to grow above markets.

From a vertical point of view, we saw weakness in the US carrier segment. However, we believe we are entering the second half with a strong pipeline, therefore we believe this is a temporary situation and anticipate nice wins in this segment.

During the quarter our execution in several other aspects of our business was very strong, including improved gross margin and the posting of a 20% operating margin. We continue to execute on our strategy according to the following key points. First, continue to be very focused on providing a comprehensive integrated solution for data center application delivery and security. Second, lead innovation in the market as it relates to data center attack mitigation, secure hybrid clouds and SDN, NFV application for secure networking. Third, increase our market footprints through traditional channels, OEMs and alliances, as well as cloud and CDN channels.

This past month, we announced our OEM agreement with Cisco. The Cisco Firepower 9300, Cisco's next generation security platform includes, in addition to the Cisco firewall and the Cisco IPS modules, the Radware DDoS protection. This is obviously a great proof point of the leadership we have in attack mitigation.

With Check Point and now Cisco as OEM partners, it's clear that our offering is the best in the market. It's also important to know that Radware DefensePro, a datacenter DDoS mitigation solution, is just one of the parts that are incorporated in our complete datacenter attack mitigation solution, which includes Alteon for protecting encrypted attacks, AppWall for web application, security and the vision management station. This solution is further extended with our DefensePipe and [watch cloud] solutions to provide a complete hybrid cloud data center cyber security solution. Therefore, we see the Check Point and Cisco OEM agreement as an excellent opportunity to feed the market with an [anchor] component of our attack mitigation solution and then strengthen our customers' datacenter protection by providing them with the complete datacenter and cloud-AMS solution we have.

In addition, we continue to expand our go-to-market channels with additional content delivery network partners. During the quarter, we announced that Limelight Networks, a leading content delivery network, is using Radware's AMS technology for Limelight DDoS Attack Interceptor. Limelight is using our DefensePro devices across their global network to detect DDoS attacks against their customers and leverage the Radware DefensePipe cloud to mitigate these attacks. With this announcement, the three largest CDN players have chosen Radware products to mitigate high volume cyber attacks, another great testimonial of our leadership in the DDoS protection space.

On the products front, we launched our new device fingerprinting technology to mitigate malicious bot attacks. Many of today's most severe security threats leverage bots and other traffic sources that can avoid detection by mimicking user behavior and dynamically changing the source IP address they use. With this new technology, our customers have the ability to track end user devices based on the device and session characteristics and not based on IP address that can be changed and (inaudible). With our device fingerprinting technology, Radware Attack Mitigation Solution can precisely identify application users or website visitors who have a history of malicious behavior and are often part of a botnet. And this provides our customers with a new level of datacenter security.

In the second quarter, we continued to see strong bookings from our new cloud and product subscription offerings. We believe we are progressing well on creating new revenue streams for Radware, complementing and expanding our existing product and maintenance revenue streams and we see a very strong acceptance for our cloud DDoS and cloud WAF offerings.

While we wanted to see stronger revenues this past quarter, we are very excited by the opportunities ahead of us, especially in the cyber security space. We feel great about our products, pipeline and position. We have a problem in Asia which we are addressing, but don't let that overshadow the tremendous opportunities that we have in front of us. We provide the best attack mitigation solution in the market. We have the strongest market adoption by leading security vendors and cloud security providers and we are in the process of launching the Cisco OEM relationship which we are very excited about.

Before concluding, I would like to thank Meir Moshe for his exceptional partnership during his 16 years tenure with Radware. Meir joined the Company before the IPO and with tremendous contribution assisted us in growing the Company more than 20 fold. We wish him all the best in his next steps.

With that I would like to open the discussion for Q&A.

(Operator Instructions) Catharine Trebnick, Dougherty & Company.

Hey, Roy, could you give us some more specifics on Asia? In the past you've done very well in China and you did have the announcement during the quarter with China Railway. So it seems like there seems to be parts of China that are working and maybe other parts of Asia that aren't. Could you give us a little bit more detail? Thank you.

Thanks a lot, Catharine. This quarter the issue was not specific to China. We did suffer for several quarters from declining trends in China, but this time the issues that we've experienced is more Asia-Pacific wise including other countries. So I would not -- it's not an issue that the China business did not perform, it actually performed better than the average of the region.

Competitively, how are you doing in Asia-Pac against A10 and F5? I know A10 has been focusing very much on smaller VARs in North America to push their solution. Were there any competitive issues that you (inaudible)?

As far as we can tell, I think also F5 published not so strong results in Asia-Pacific, and I don't think it was a competitive issue. And having said that, I think we need to fix our execution and we are addressing that. So make no mistake, we are going to make some adjustments to our Asia-Pacific operations because as you can see from our Americas and EMEA performance, not only this last quarter but consistently over the several quarters, we definitely see the opportunity for strong growth and there's no reason in our mind that Asia-Pacific will trend that.

Alex Henderson, Needham.

Could you give us some sense of, if we strip out the Asia side of it, what the relative growth in the US and Europe or outside non-Asian markets, what the security growth looked like versus the ADC growth looked like in those two geographies so we can get some sense of what the baseline is excluding the disruption from Asia?

We're not breaking ADC and security, Alex, but you should assume that security was growing above the numbers I'm going to give you shortly and ADC below. So Americas grew 16%, EMEA grew 18% and the average growth rate if you take them together is 16% to 17%, around 17%. And as I said, security is the fastest grower and ADC is the slower grower in these numbers.

So given the significant challenge in APAC, how should we view the timeline to resolve that issue? How much do you think is a function of your execution versus how much of the challenge over there is a function of weakness in China, weakness in Asia as a result of the weakness in China spilling out into economic activity and causing cautiousness in capital spending and other projects? How do we view what's Radware controllable versus what's non-Radware controllable?

So definitely seems that the overall conditions in Asia did not help us this quarter, but given our size, the size of sales we're doing there in millions of dollars versus what we believe is the opportunity, I don't think it's meaningless for us to look at the market conditions. It's all about our execution. We're demonstrating it in EMEA, we've demonstrated in the Americas during the past several years even before there is a full recovery of the economy. So we're definitely looking on our sales. We believe we can -- we need in every region to grow double digit and Asia Pacific is a great market. We've been very strong there in the past and we should get back to the way we execute.

Is that a two or three-quarter phenomenon then?

Generally to fix and just to reorganize it's something around that hopefully. In the past in some places we were able to do it maybe be a bit shorter, but I would say that's a reasonable assumption.

Michael Kim, Imperial Capital.

Can you guys talk a little about the Cisco OEM partnership for the Firepower 9300 appliance and the opportunities that you see in the service provider market and how we should think about the pace of that expansion over time?

Okay. So, as I've mentioned, we're extremely excited about this agreement. The way we see it, the new Firepower 9300 and that product line evolution is the next-generation security platform for Cisco. As the Cisco's CEO is pointing, security is a major focus area for them and therefore believe there's going to be a very big push of this product line to the market.

We believe that [our end module], that is the only non-Cisco module in this platform is basically the Cisco ASA Firewall, the Cisco Sourcefire IPS and the Radware DDoS, those are the components of the next-generation Cisco platform. With these together, they're delivering a very unique security offering to the market. And therefore, I am speaking beyond the service provider market, we believe that if Cisco is going to push it the way they're claiming to, there is going to be a very fast adoption of the platform, a very broad set of channels that are going to stand behind it and as a result, we have very high expectation for what that can mean for Radware.

On top of that by Cisco placing the Radware DDoS component as service providers and as key enterprise accounts, it has a very big impact for the rest of our attack mitigation solution component as all of our components are not separate products but a fully integrated solution.

Our Web Application Firewall, our DefensePro on-prem unit, our DefensePipe cloud, our WAF cloud are all signaling between themselves the information about attackers, information about application baseline, information about filters and new fingerprints that they found to bring security to a whole new level beyond a specific or I would say isolated security device [along the] network.

Therefore by Check Point and Cisco putting those proceedings, those enterprise accounts with our denial-of-service protection, that's a very, very good (inaudible) for us to go and serve a complete attack integration solution.

So we are seeing what we are looking for, a revenue stream directly from Cisco given the offering that they bring, the coverage of the market, and on top of that our ability to really leverage it and create a very, very strong security business in all those customers and service providers.

And then can you provide also an update on your other partnership with Cisco for ACI? I think last quarter you talked about somewhere around 20 proof of concepts. Any commentary on this as some of those customers are migrating to ACI and if you've seen maybe an uptick in activity with some of the larger customers?

We're seeing still a lot of proof of concept activity. There's more and more customers do that. I don't think it's exploding. I think there's 30, 40 of them right now. Also with our discussions with Cisco, we understand many of their customers are in [this field at this stage]. But we're definitely seeing some very large customers that are starting to test it. And with that not only that we are able to sell both our ADC and security, there's a lot of automation, orchestration, software integration that's part of it that makes our offering extremely strategic. So we continue to work with that, we've done our joint working out with Cisco and to all their ACI product experts across the world, we have over 150 attendees in that, so we continue to work together with Cisco above the ACI opportunity.

Jess Lubert, Wells Fargo.

This is Mike calling on for Jess. Hey Roy and Meir, best of luck in the future. Just a couple of housekeeping items and then two questions. First off, how much of a benefit was FX to the OpEx in Q2?

The financial had almost meaningless contribution this quarter, it was around [$150,000].

Okay. And then just secondly can you reiterate what the OpEx guidance was for Q3 and what assumptions regarding FX are baked in?

Again the OpEx for Q3 will range between $36.4 million to $37.2 million.

Okay. And FX, is it roughly stable versus Q2?

Yes, this is mainly adding headcount, continue to invest in the field marketing and sales teams that we are adding constantly all over the world.

And then just as far as the US carrier market, I think it's a mix across the (inaudible). Can you just talk a little bit about your pipeline with the large US carriers and the conversations you've been having and what gives you confidence that we'll see improvement in the second half of this year?

Okay. So in general, the first half, not only last quarter, but also the first quarter, was quite weak for us in US carriers although international carriers business did pretty well. In the US carriers, we continue to have several programs, both around application delivery and a lot of programs around security. The reason we feel much more confident is that we are involved in several purchasing processes already. We don't know whether the timeline will be Q3, Q4, but they are definitely for this year's budget and the reason we are quite optimistic is that it's not deals that we are feeling competition on, we moved above that and now budgeting in purchasing processes.

Okay. And then just the last one, as far as the competitive landscape in the ADC market, it seems like maybe there's some opportunity with disruption around Citrix NetScaler and this recently being sold to Brocade and you've got the Cisco ACI business going [into buy] finally the end of Q3, can you just talk about the dynamics of what you're seeing from a competitive aspect there and does this create opportunity for you?

So in the second quarter we didn't see much of a change. We didn't see a lot of Riverbed before. I think they were quite small. Given what Brocade said their number is around [$2 million] a quarter I think. So actually, this transaction we didn't see a lot of impact from it.

I think the key point that might impact to some extent the dynamics in the ADC market is what will happen with the Citrix NetScaler division, are they going to sell it, is there going to be a lot of disruption around it et cetera. But in general we didn't see any in change in the competitive dynamic, not in ADC and by the way, not in security.

Ittai Kidron, Oppenheimer.

This is Michael on for Ittai. Thanks for taking my question. I just wanted to ask you in terms of the outlook, you guys -- you cited strong booking in the cloud subscription, you said you saw a strong pipeline for the US carriers and yet the revenue outlook for the third quarter was kind of a little bit softer than what we are looking for. Is that primarily an APAC issue or are there other issues we should think about?

First overall we are conservative given our Q2 results. Second, the cloud subscription booking is very strong but we have recognized these pro rata over the period of the contract. So its current impact on Q3 versus what we've recognized in Q2 is obviously not as big although it's building up, it's a new revenue stream which is growing and I think it will start to play a bigger and bigger role in our revenue. Regarding the US carriers, we are not confident that the timing of these orders will be Q3 or Q4 and as a result we're, again, being conservative with the guidance we provided. So all in all we think the pipeline is very strong, we think our wins and positioning is very strong. In the short term we are applying some conservatism to our guidance to the Street.

And then on the cloud subscription offering, we've been hearing for several quarters about the strong bookings and how that is doing well. I think last quarter was record booking. Are you ever going to provide us with some kind of metric whether it's just bookings growth or some kind of a quantitative metric that we get our hands around and track?

We are evaluating it seriously. I think that might be an interesting metric to share. But no, we need some more track records with these bookings. Most of those services as you recall started this year. We want to see clearly that we have the right trends and that it's growing and continues to grow as we look for it and then we will probably share some information about it.

Joseph Wolf, Barclays.

Hey, guys, this is Brian Finneran for Joe. First I just wanted to say good luck to Meir and thanks for the help that you've provided for Joe and I. I guess with Doron coming in as the new CFO, can we get some commentary on kind of the cash management story and is it going to stay the same or are you guys going to be still very conservative on M&A or could we see you guys become potentially a little more aggressive on the M&A front going forward?

Okay. So it's probably me that [needs to say things]. I don't think our policies are personal or personality driven but it's more a strategic view of the business that we and the Board come together to that conclusion. Having said that, and we've said it many times on the call, we are looking for acquisitions to grow, beyond the organic growth, also inorganically our business. That's our statement.

We are looking obviously to use our cash to finance these acquisitions. At the same time we are doing a very, very detailed analysis of the possible target, of the impact on our P&L and as we said we are going to -- we are looking for real business impact from this acquisition. Together with, I would say, more strategic or a large business acquisitions, there might be some small technology oriented acquisitions that we'll do even there. We've done one of these with the Strangeloop acquisition two years ago.

And we might do similar acquisitions in the future, but those -- their impact, I would say, on our cash position would be far more limited although we look for strategic value from these technology buys. So we are looking on both, technology backings as well as large business acquisitions. We are definitely looking to utilize our cash to accelerate the growth of the Company and to leverage the position we have in the markets we are playing and strengthen that.

Great. That's helpful. And then can you just provide any color on what you're seeing in the size of deals, lack of large deals in the quarter kind of weigh on results at all and what's the pipeline look like there as we think about third quarter and fourth quarter going forward?

Going forward, we have a very good pipeline also of large deals. In Q2 we saw a bit less of the large multimillion dollar deals, but I will not read too much to it. Already in the month of July we booked a couple of deals. So we feel good on the large deals. We feel good about our ability to land major account, both expansions as well as new accounts, and I don't see a problem there.

(Operator Instructions) Mark Keller, DA Davidson.

Most of mine have been answered, but just as a follow-up on the uses of cash from the last question, did you buy any stock back in the quarter?

This quarter we haven't bought any shares back. But we have $40 million planned both 12 months, and we probably will be more active in buying back shares this quarter.

Okay, great. That's all I have. Thanks.

Rohit Chopra, Buckingham.

Roy, can you be very specific about the changes you're actually instituting in the APAC region to try to change the trajectory there? Are there people that you're changing out, are you adding more people, VARs et cetera? So if you could be specific there, that's my first question. And then I had a couple on the Cisco OEM if you don't mind. Number one, how do you ensure that there's no channel conflict now with you, Check Point and now Cisco as they offer a DDoS solution and they'll eventually move down the stream, so now you have three people sort of offering your solutions. So how do you manage channel conflict there? And then maybe some specifics on how revenue is recognized?

Okay. So first of all regarding specifics about what we're planning to do in Asia Pacific, I will not go into the [details], I don't think it's the right time. But basically what we're going to do is we're going to copy what we've done in the Americas, in EMEA and were successful in both [sectors] to Asia Pacific. So before we said that we took what we've done in Americas to EMEA. I think we're seeing good results there. There is a lot of things, the way we're organizing our field activity that we've changed in these two [sectors] and we're going to bring the same structure now to Asia Pacific with some local adjustments, but overall, the same strategy and we want to see it working.

Regarding the Cisco OEM channel conflict, it's true that now both the Radware sales force channel, the Check Point channel and Cisco will push the Radware offering. By the way, there are also other channels like large cloud DDoS providers, large carriers that are pushing the Radware solution as well. But there is differences between all those channels. For example, the Check Point OEM is -- Check Point is white labeling our existing appliances, hardware and software, as Check Point DDoS Protector. So basically it's one-to-one our product line. The Cisco OEM is not a DDoS or attack mitigation device. What Cisco is selling is a next-generation security platform which includes Firewall, IPS and DDoS. It's not DDoS only. In that regard, it does not compete on the sales and opportunities that we and Check Point are currently going after.

In addition, what we're selling to Cisco is not an appliance, but a software, software capability of our solution that's being integrated into the Cisco product line. So as a matter of fact, we are not seeing here a channel conflict. If at all, we are seeing an opportunity to penetrate the Cisco channel with our complete offer that can interact with the Cisco module on the Firepower 9300.

Regarding the third question of revenue recognition, we are selling you software with maintenance and all the regular revenue recognition rule on selling software and maintenance contracts apply here and there's going to be probably a time shift obviously of roughly one quarter between when Cisco sells and when we get the information and recognize that. That's, I would say, the only difference between that and a regular software sale by Radware.

Ameet Prabhu, RBC.

Just a quick clarification on the service provider side. You mentioned deals being recognized potentially in 3Q and 4Q. Is there any concern that they could potentially slip into 1Q of next year?

Yes, it might be. What I answered on the US service providers, and I want to make it clear, is not that we've received the orders and now it's only about revenue recognition, we are in the purchasing process. So the timing of when we are just getting the deal and just the timing of when we can recognize (inaudible) and that's why we applied what I've mentioned a conservative measure on Q3.

And just to clarify also on the cloud offering bookings, I think you mentioned a 100% year-over-year growth last quarter. Are we in that same ballpark, any number in terms of bookings that you could share?

I think it continues to be very, very strong growth and I don't have the exact percentages in front of me but we're definitely looking for the full year to be, not only last quarter but for the full year, to be in a very, very meaningful percent of growth probably around 100%.

And the growth is being driven by the spurt in the security revenue side. How are we thinking about the security investments? Is there a plan to sort of double down on security organically, especially considering that it's a buy and build consideration? You talked about being a bit more mindful on valuations considering the valuations for security assets that are out there. Do we expect a doubling down on the investments organically?

We already invested this year, and I think we've shared it with you in the previous calls, we've already invested considerably in the R&D portion of security, growing very, very substantially. A lot of the additional headcount that went into R&D went into security. Also in the field we've added specific resources in sales, marketing, business development. For that and obviously as we see good [surrendering] growth there, we're going to put more resources. And having said that, we believe also the ADC is a growth business and we are investing in sales headcount, also targeted in that, targeted in key areas et cetera. So we will see opportunities across.

Definitely cyber security is very, very fast growing for us, but we do see opportunities also in the ADC and we're going to put more field resources as Meir mentioned and as evident by our OpEx guidance already from the coming quarter to support that.

Okay, thank you and all the best.

Thank you.

And Mr. Zisapel there are no further questions at this time.

Okay, thank you very much everyone for attending and have a great day.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using the AT&T Executive Teleconference. You may now disconnect.