Radware Ltd.
Q2 2012 Earnings Call Transcript

Published: 26 Jul 2012

[Operator:]

Good afternoon and thank you very much for standing by. Welcome to the Radware Second Quarter 2012 Results. (Operator instructions) I must remind you all that this conference is being recorded today, Thursday, the 26th of July, 2012. I would now like to hand the conference over to your speaker for today, President and CEO of Radware, Roy Zisapel. Please go ahead, sir.

[Roy Zisapel:]

Thank you. Good morning, everyone, and welcome to Radware's Second Quarter 2012 Earnings Conference Call. Joining me today is Meir Moshe, our Chief Financial Officer. Meir will start the call by reviewing the financial results, and afterwards I'll discuss the business highlights of the second quarter. After my comments, we will open the discussion for the Q&A. Meir?

[Meir Moshe:]

OK. Thank you Roy, and welcome everyone to our second quarter conference call. First, I would like to review the Safe Harbor language. During the course of this conference call, we make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are just predictions, and that actual events or results may differ materially, including, but are not limited to general business conditions and our ability to address changes in our industry, changes in demand for products, the timing and amount of orders, and other risks detailed from time-to-time in Radware's filings. 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 2012. Now ladies and gentlemen for the financials

[Roy Zisapel:]

Thank you, Meir. Before I address the key operational highlights of the quarter, I would like to take a moment and comment on the Juniper-Riverbed deal. We were aware of the Enterprise opportunity at Juniper. Juniper, as announced in their earnings release, wanted to purchase a licensed source code in the application delivery space and integrate it into their products, [targeted] at a data center. Without commenting too specifically on the deal, Radware’s strategy is to partner for the long term and build OEM channels. We don’t think that selling or licensing our intellectual property for these amounts is a good business decision for our company. We continue to maintain a constructive and strong relationship with the carrier side of Juniper where we provide the application delivery for their M-X platform of carrier routers. And as we own the underlying intellectual property, we will continue to develop significant enhancements to the capability and functionality of the core application delivery engine, which will be incorporated in the products we sell directly to our enterprise and carrier customers, as well as in the products that reach the markets through our partners, such as Juniper. Regarding the enterprise application delivery, we don’t believe Juniper will be in the market with an enterprise application delivery offering for at least two years or more. With our current investment of over 350 R&D people, and our increased investments in this space, we expect to make significant advances from our current technology leading market position that we feel will be quite difficult for others to match. In addition, our view is that selling standalone application delivery products to the enterprise market requires sizeable sales and system engineering specialization, a capability that is a significant barrier to entry. I would also like to take this opportunity to reiterate that we believe that the OEM channel will be tremendously rewarding for Radware over the coming quarters and years. We will continue to work on expanding our partnership model by aligning ourselves for each market segment with the partner that we believe can best serve that specific market. We believe Juniper will be a very successful partner in helping us significantly grow our share in the carrier routing marketplace worldwide. A good start to that is our recent joint win of a U.S. D1 carrier. For the security market, we chose to enter into a strategic OEM agreement with Checkpoint, and industry-recognized leader in security technology. The Checkpoint partnership will provide us with advantageous ability to expand our footprint within the network security market. Along these same lines, we will continue to pursue other strategically desirable and potential partners for hardware in the enterprise data center market. Returning to our discussion of the quarter and our business, we remained focused on two key markets

[Operator:]

Thank you very much. (Operator instructions) Your first question today comes from Joseph Wolf. Please ask your question.

[Joseph Wolf:]

Hi. Thank you. I wanted to ask two questions. The first is you gave some good detail on the OEM agreements, and I’m wondering if we could get updates perhaps on both the Check Point and the Juniper with regard to revenue progress and when we can start to see the benefits of that also on the margin side of the business? My second question is with regard to the Software Defined Networks, which was also helpful; could you go into a little bit more detail about what the Radware approach is and how this fits into both the attack mitigation and the traditional load balancing applications that Radware is running and the hardware/software applications of SDN?

[Roy Zisapel:]

Okay. So first, on the OEM revenues, we don’t break it specifically, but as I’ve mentioned, we’ve currently won with Juniper a major U.S. D1 carrier, and we will be recognizing those revenues, so that’s a very good, large deal as signed, and we are (inaudible) as well. Regarding Check Point, you know Check Point we announced the OEM agreement very late in the quarter. I think it was in June in the last two weeks, so we’ve done a bit of sales in Q2, but obviously, we are seeing a good ramp in this quarter and going forward. So definitely those OEM’s are starting to contribute to revenues. And regarding the margin enhancement, the Juniper deal is a software only. The Check Point is a complete product, so there’s different margin impacts for each partner. Regarding your second question on the SDN, SDN is dealing with the Layer 2 and the Layer 3 of the network, the connectivity. On top of LDN’s though, you need to provide advanced application services. The key question is how do you deploy security, load balancing, and acceleration into SDN architecture. That’s where our focus is, and our solutions are enabling application delivery, application security, denial-of-service protection in the SDN architecture, and together with NEC, we have a joint solution that we are start to market about that.

[Joseph Wolf:]

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

[Roy Zisapel:]

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

[Joseph Wolf:]

Okay. Great. Thank you.

[Operator:]

Thank you very much. Your next question comes from Ittai Kidron. Please ask your question.

[Ittai Kidron:]

Thanks. Roy, I do want to go back to the Juniper-Riverbed announcement. You mentioned a few things, for example, that Juniper won’t be in the market two years, that you don’t want to license your software for that price, for that amount. If I remember, that was the exact wording. You know, you have maybe 4% or 5% market share in the ADCA market. There’s a big, massive market out there, and even if you are successful and manage to double your market share from here it feels like there's so much more out there at the very high-end of the data center–which is where Juniper was targeting this– that you might not have a reach into. Just from a pure go-to-market, it doesn't seem like there's a conflict here. Why not sell to Juniper?

[Roy Zisapel:]

I think, first, on the market sharer we have different data or on total market share and definitely our view of the overall market. Regarding the ADC market as a whole and the go-to-market I think we need to differentiate between a standalone ADC being sold in the market. Obviously, if it's based on our software it completely overlaps to our sales and product offering. With an ID Licensing deal you don't enjoy any future revenues. Regardless of the amount, if we have today roughly a $200 million business all of that business is in an overlapping position. Concerning their solution as an integrated product then the addressable market is the Juniper market share in the data center switching business, which is growing. We have all respect for Juniper, but I don't think by any means it covers the whole data center opportunity. As I've mentioned in our comments, our strategy's focused on OEM and long-term relationship tha translates into market share, not only into cash on the balance sheet but to real customer acquisition and ongoing customer relationship. It's focused on aligning ourselves with the best partner for each market opportunity. We do believe that Juniper is a great partner for us on the carrier routing even their market share and success. On security, for example, a similar question can be posed, who was the best partner? We thought that although Cisco is playing there, Juniper is playing in the space; Check Point is playing in the space. We thought that Check Point is our best partner for that market. For the enterprise data center I think there is some relevant options we are pursuing.

[Ittai Kidron:]

If Juniper is going be very successful with its data center switch architecture they'll have, in a good scenario, 4% or 5%, 6% of the data center market which is going to be considered a very success for the company, $75 million to you in licensing revenue pretty much means $75 million in net income. For you to generate $75 million in net income you would have to generate about $400 million of hardware sales to get to that number. You walked away from $400 million in hardware sales guaranteed regardless of Juniper's success or lack thereof on the potential that on the margin there is some overlap between you and them. It feels like a very big missed opportunity here.

[Roy Zisapel:]

I think, I beg to differ. I apologize that our view is different. Regarding the profit if you look at our business model and the growth of profitability it doesn't take $400 million of incremental revenues to generate the $75 million of profit, definitely not over a period of several years, number one. Number two, when you sell codes, all your codes, the overlap is substantial. Therefore, I think there's also not only an additive opportunity but the negative. Third, ours is a public company and long-term view we are selling products, we are not selling IP.

[Ittai Kidron:]

With regards to the carrier site, I understand Juniper; in your statement that you're still partners in everything but logically speaking why would you think that Juniper could take that Riverbed code and within a two year timeframe replace you out of that opportunity as well? Because they've already paid for the Riverbed code, it'll be a sunk cost from their standpoint. They won’t have to pay anything incremental to do that. Whereas for you still pay they still pay your licenses each time they sell this.

[Roy Zisapel:]

In theory everything is possible but I think also Juniper was very clear about their intentions. From a practical point of view I think there are several differences. First, the use cases of the ADC and the carrier space are very different than ADC in the data center. Just in short, we're talking about additional protocols not only web protocols. There's SIP, there's diameter, there's DNS, there's content delivery networks. Second, from a deployment point of view, the low balances are very transparent versus displaying the server role in the ADC. I can continue on and on. I don't believe that the code, the Juniper license has this capability. It's not just integrating. That code is net new developments that they need to do and I think those developments from our own experience and from market experience, those are substantial. Second, I think there's an architecture difference. The MX router, I don't want to go into too many details but the architecture and the way it works, it's very different than the Intel base ADC appliances or the data center. A different architecture software is needed and to be integrated. All of that leads me and also Juniper to the conclusion that it's better to partner there with an industry leading ADC that's ready to market and that they're actively selling to their customers. I believe this relationship will continue. We will definitely continue to evolve that, not only to keep the current leadership position, but also to extend the capabilities of the [blade] and then I think it's a win-win for both companies.

[Ittai Kidron:]

Very good, lastly regarding your guidance, at the mid-point of your guidance you have a $700,000 increase on a core of a quarter bases; it sounds like Check Point is–I think you mentioned is seeing strong momentum. I assume it will start contributing already in the third quarter, correct me if I'm wrong, if so is there a growth in your core business in the September Quarter or much of the increase here is really through the increase traction through the Juniper carrier site and Check Point relationship.

[Roy Zisapel:]

As for the guidance the September quarter is said back-end loaded and that guidance needs to be conservative. In addition, the global market corner may require extra caution we believe. Please also bear in mind that the weakening of the Euro effect negatively our top line.

[Ittai Kidron:]

Very good, okay, so there's a little bit precaution there. More caution than normal, than with respect to guidance.

[Roy Zisapel:]

Correct.

[Ittai Kidron:]

And lastly Meir can you just clarify AFEX, what's the impact there? What's your exposure? Do you price in Europe in Euros on in dollars and what's the impact there?

[Meir Moshe:]

In Europe, in Euro countries we price in Euros and their effect there on the top line was $150,000 this quarter. If it remains the same it will be even higher than the impact on the top line.

[Ittai Kidron:]

Very good, all right, good luck guys.

[Operator:]

(Operators instructions) Your next question comes from Rohit Chopra, please ask your question.

[Rohit Chopra:]

Thank you very much. Meir, I just wanted to ask you about the target model for the end of the year are you still targeting operating margins of 23% and then maybe just, I don't know, look forward into 2013 should we expect ongoing increases in operating margins. And then could you also talk about the growth of the security business. Security, I think, is somewhere between 20 and 25. I just know if that's going faster than the core business, if you don't mind.

[Meir Moshe:]

Okay, as for the business model, you can see that this quarter actually we delivered 21% of operating margins. If you calculate, however our guidance also for the September Quarter, our high-end guidance still represents 22% of operating margins. Exiting the year with 23% operating margins it looks achievable and we [reiterate] that one. As for the next year taking into consideration the leverage, we have in our business model, if revenues are up the top line is up. It also will increase the margins but it's too early to talk about it.

[Rohit Chopra:]

And lastly, can you just go through the geographies just of everybody. I think it's just important to just get us in to what's happening in the different geo's.

[Meir Moshe:]

U.S. this quarter was 31% from the revenues, India 32% and Asia PAC 37%.

[Rohit Chopra:]

Thank you.

[Operator:]

Thank you very much. Your next question comes from Mark Sue, please ask your question.

[Mark Sue:]

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

[Roy Zisapel:]

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

[Mark Sue:]

Okay, can we get to 10% by the end of this year for revenues?

[Roy Zisapel:]

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

[Mark Sue:]

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

[Roy Zisapel:]

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

[Mark Sue:]

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

[Roy Zisapel:]

I think we should target this one definitely regular seasonality. I believe also in the two partners that are public now, Juniper and Check Point also experience the same seasonality. I believe it's the overall markets seasonality as well. I do believe that's the right assumption.

[Mark Sue:]

Okay, thank you and good luck gentleman.

[Operator:]

Thank you very much. (Operator instructions) Your next question comes from Mike [Blass]. Please ask your question.

[Unidentified Analyst:]

Could you describe your current relationship with IBM and what you're going to expand, your relationship?

[Roy Zisapel:]

We have a alliance with IBM across multiple fronts. We are an approved partner for their cloud business, the Smart Cloud Enterprise. We are an approve partner for their next generation pure system, server and computer for the Cloud with our Alteon VA and then we have certain go-to-market programs across the world with them. Currently there are a [lease-seller] for us in certain parts of the world and certain customers and we have corporate programs around Cloud and the next pure system with.

[Unidentified Analyst:]

Are you looking to expand your relationship with them?

[Roy Zisapel:]

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

[Operator:]

Your next question comes from Noah Steinberg, please ask your question.

[Unidentified Analyst:]

Morning guys, sounds like your cash seems to be growing very nicely, can you talk a little bit about what you could do with over $250 million in cash?

[Roy Zisapel:]

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

[Unidentified Analyst:]

Could you also break down the carrier and the enterprise divisions please?

[Roy Zisapel:]

The carrier this quarter was 30% and the enterprise 70%.

[Unidentified Analyst:]

Okay great, thanks.

[Operator:]

Thank you. (Operator instructions) There seems to be no more questions. Mr. Zisapel, please go ahead.

[Roy Zisapel:]

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

[Operator:]

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