Q2 2021 Radware Ltd Earnings Call

Welcome to the Radware conference call discussing second quarter 2021 results and thank you.

Oh for holding at this time, all participants on a listen only mode. After the speaker's presentation, there will be a question and answer session. So on.

The question during the session you will need to press star 1 on your telephone as a reminder, this conference is being.

Caught it July 'twenty 8.2021 if you were kind of any further assistance. Please press star Zero, Oh, now I like to turn the call over to you Scott Aaron's.

The right day Investor Relations at Radware. Please go ahead.

Thank you Christie.

Good morning, everyone and welcome to <unk> second quarter of 'twenty 'twenty 1.

Conference call. Joining me today are always disciplined president and Chief Executive Officer, and Michael Goldberg VP Finance, a copy of today's press release and financial statements as well as the Investor kit for the second quarter.

Are available in the Investor Relations section of our website.

During today's call we may make.

Projection or other forward looking statements regarding future events or future financial performance of the company.

Forward looking statements are subject to various risks and uncertainties and actual results could differ materially from what is most current forecast and estimates.

Sucks.

That could cause or contribute to such differences include but are not limited to impact from the COVID-19, pandemic general business conditions, and our ability to address changes in our industry changes in demand for products the timing in the amount of orders and other risks detailed from time to time in other.

Our debt.

We refer you to the documents the company files and furnishes from time to time with the efficacy specifically the company's last.

On form 20-F, our sides on FY 'twenty 2021we on.

Undertakes no on weakness will revise or update any forward looking statements in order to reflect.

The words or circumstances. After the date of such statements you've made I will now turn the call to ROI discipline.

Thank you Scott and thank you all for joining us today.

I'm excited to report strong second quarter that exceeded our expectations with record revenue on an accelerated growth.

Our strong performance extended across all business lines in all geographies include.

Including growth in large deals.

Record, new customer business and record the new club logos.

Our achievements demonstrate the continued expansion of our cloud and application security businesses.

Our ability.

To execute on strong demand to our solutions and their ongoing success, helping our customers protect their critical applications.

Second quarter revenue was a record $70 million, representing you will deliver growth of 19% and 1 of the fastest growth rates.

We had in recent years.

Cloud and subscription continued to grow strongly at 27% in the second quarter, reaching another record quarter.

These results are underpinned by the accelerated transformation of enterprises to digital.

And the increase in global cyber.

Attacks that make it critical for our customers to ensure they have the best possible cyber security solution for their business and applications.

In the second quarter, the strong demand for our solutions led to solid growth in bookings and we earn some impressive wins.

So why do we win.

Sure.

We are winning because of our superior technology.

<unk> of our technology, our sophisticated algorithms they combine machine learning fuzzy logic algorithms as well as various behavioral based detection and protection algorithms.

Combined these technologies enable our solutions to automatically.

Adapt to the changing threat landscape and differentiate between the GP and attack traffic.

That in turn position us to deliver the widest fastest and most accurate security protection in an environment of constant attacks.

1 example is a large video gaming company in Asia Pacific.

<unk>, which experienced a complicated ddos attack, both inside and outside the country.

When their existing security solutions couldn't mitigate the attack.

Since time will sort of essence to present, a severe disruption to their customers. They turn to us for an emergency cloud Ddos solution.

Shortly thereafter, they expanded their solution to a hybrid cloud ddos by placing our defense per appliances at the edge of their data centers.

Another example is a fortune 500 company, which is 1 of the largest rental companies in the U S.

This company received the ransomware.

Later, which was followed immediately by a ddos attack that exceeded their internet capacity and brought them down.

Partners Cisco reached out to us and we mitigated the attack following our success the customer chose Radware hybrid cloud Ddos protection based on our unique ability to manage.

Right.

These are just 2 examples that demonstrate the strength of our technology and our ability to successfully mitigate complex cyber attacks in real time.

The second reason, we are winning new business is because of the breadth of the cloud security offering.

Hackers are using.

I think a large set of attack tools and enterprises are looking for sophisticated security solutions to protect their applications and mitigate these cyber attacks.

Our broad cloud security offering provides end to end protection for these ads for their assets and applications.

We offer fully.

He lives in aged integrated web application protection book attack mitigation, API security and Ddos protection Cloud service, coupled with public cloud security.

There are 2 notable cloud wins I'd like to share from the second quarter.

We signed a very large.

<unk> met all the application security and Ddos deal with 1 of the largest construction equipment manufacturers in the world.

A fortune 500 company was facing challenges protecting their applications.

He chose radware because of our deep security expertise and our ability to execute and deliver web.

Cash collections security in any form factor.

In the end it became evident that the other offered the best solution for securing several thousands of applications over many different environments.

The second major cloud win that we signed in the second quarter was with the largest service provider in Latin America.

For our suite of application security solutions Web application security Bot management and Ddos.

The customer was severely impacted by both the tax on Ddos activity.

After failing to contain the attacks using rate limiting solutions, we walk the customer through the right way to approach.

<unk>, we offered the best protection and proved it from day, 1 in real traffic proof of concept.

The third reason, we are winning new business is because of our proven reputation and our ability to expand our business across our existing customer base.

Our customers continue to acknowledge our industry leadership.

And our ability to keep their applications safe and protected.

For example, 1 of the largest e-commerce companies in the World.

A longtime customer of our Ddos appliances.

Added last year, our cloud Ddos solution.

In the second quarter, they decided to strengthen their application security.

By adding our bot manager 2 dose solution to meet their growing security need.

Fourth we continue.

To win new business because of our partnerships.

In the last couple of years.

We've been working on expanding our channel relationships we.

<unk> continued to invest in training and educating our partners and expect these investments to bear fruits overtime.

In the second quarter, we signed a deal with a large U S Hospital, which was looking for more visibility and reported.

With the help of our partner checkpoint we presented.

Hospital, our latest capabilities and upgraded their solutions.

We also see the large deal with a global online fashion retailer.

This retailer was planning planning to extend on network, a move that potentially increase their exposure to ddos attacks and threaten the ability to deliver goods to their customers.

Customers without disruption.

Replace these retailers incumbent solution with our hybrid cloud Ddos solution. The key success factor in closing this deal was not only the strength of our protection, but also our close relationships with checkpoint.

In summary, the momentum in our business continues.

<unk> to be strong across the board supported by significant growth in our cloud security business.

Our pipeline is robust.

With the accelerating pace of digital transformation and the shift to the cloud the market provides many opportunities for us.

And we are confident in our ability to.

Execute on them.

Before turning the call to Mike and I would like to take this opportunity to thank our customers and partners for their trust in us and I would like to thank our employees for their great efforts and dedication make it.

Thank you and good day everyone.

I am pleased to provide the analysis.

So far on financial results and business performance for the second quarter of 2021.

To remind you that unless otherwise indicated.

Financial results on long ago.

On the Asian between the GAAP and non-GAAP results for the quarter on detailed in our press release.

We had all debt outstanding.

Quarter on with both the top and bottom line results far exceeding our expectations.

Second quarter 2021 revenue, we channel a code of $70 million, representing an increase of 19% year over year and acceleration growth from 11% growth in the first quarter of.

2021.

Total revenue was driven mainly by our application security and our cloud business.

In the second quarter of 2021 cloud and subscription a O L low 27% compared to Q2.2020 in total a Ohio was 177 million.

Sales and increase of 8% compared to the same period of last year.

Looking on a joke office, we had growth across all regions.

Americas revenue grew 2% in Q2.2021 compared to the same period of last year and accounted for 40%.

On the total revenue in the second quarter.

EMEA and APAC.

We are very strong.

And now revenue low 36% in Q2, 2021 compared to the same period of last year and the content or 35% of total revenue.

Epic on revenue increased 30.

<unk> per cent in Q2 'twenty.

2021, and the content for 25% of total revenue in the quarter.

I will now discuss expenses and profit.

Gross margin for the second quarter of 2021 wage 82, 3% compared to 83, 1%.

2 per day same period of last year.

Our gross margin can fluctuate from quarter to quarter.

The result of product and geographic mix.

Operating expenses in Q2.2021.

$48.6 million up 10% from Q2 last year.

Kris.

As a result of higher commissions as well as travel and marketing expenses.

We have lower in Q2.2020 due to COVID-19.

Excluding the effects impacts impact our reported expenses would have been $1.4 million low oil due to the weakening of the dollar.

The new Israeli shekel.

Operating income more than doubled and reached $8.8 million demonstrating once again the good leverage in our model.

The increase in operating income led to an expansion in the operating from LG.

In Q2.2021.

<unk> operating margin expanded by 530 basis points to 12, 6% compared to 7.3% in Q2.2020.

Financial income was $1.7 million compared to $2.6 million in Q2 of last year.

Similar.

Third quarter and as we highlighted in previous quarters. The financial income is impacted by the declining yield of marketing securities and deposits.

Yeah.

Tax rate for the quarter was $15.4 per cent compared to 13, 1% in Q2.2020.

The expected tax on.

<unk> to 2021 is approximately 15% to 16%.

Earnings per diluted share for the second quarter of 2021 increased 50% to 19% compared to the same period last year.

Turning to the balance sheet and cash flow items.

Cash flow from operations.

From a 19 on Rollouts in Q2, 2021 compared to $18 million in the second quarter of last year.

Total cash and financial investments at the end of June 'twenty, 'twenty, 1 will flow hundreds and $14 million.

As of the second quarter of 2021, we used $4.6 million.

<unk>. So we purchased 163000 of our all day never shows.

In the first half of the year used $35 million to buyback to buyback our own shares and Doug $45 million remains available under our 2021 repurchase plan.

I'll turn the call back.

<unk>, who will provide the outlook for the third quarter.

Thank you Mike.

We expect Q3 total revenue to be in the range of $70 million to $72 million.

We expect the continued strength of these early shakeout to cause the evils of really increasing although low.

Operating expenses throughout 2020.

'twenty 1.

We expect our operating expenses to be between $49 million and $50 million.

This operating expense level reflects an estimated $1.3 million negative impact from FX compared to Q3, 'twenty 'twenty rates.

With that.

Q3, 'twenty 'twenty 1.

1 fully diluted EPS is expected to be in the range of 18 to 20 cents.

With our first half published results the guidance, we just shared for the third quarter and the continued strength, we see for the second half.

I would like to know that our yearly growth rate.

At close to 12% value well above our published model of 7% to 9% annual growth rate.

This accelerated growth is driven by the growth in subscriptions and specifically cloud security.

I will now turn the call.

Over to the airport operator for questions.

It will be for either.

Yeah.

Yeah.

Christine can you hear me now you can hear me Okay. At this time as a reminder to ask a question you on nature Press Star 1 on your telephone to withdraw your question press the pound key.

Standby, while we compile the Q&A roster.

Yeah.

Our first question will come from the line of George <unk> with Jefferies.

Hi, Thanks, very much and congratulations on the nice results here guys I guess I wanted to.

So just by asking if you guys had any supply chain impacts in the quarter. It seems like yeah. That's.

It's been a constant through earning season in recent quarters, but I know you didn't expect to see much coming into the quarter, but.

I'm just kind of following up on that was there was there any impact in terms of either.

Mis revenue.

<unk> or margin.

Yeah, we.

We had very little impact on the on revenues there is obvious impact on the on our cost and some of those component pricing pricing has gone up significantly.

Especially if we would like express delivery or.

And to get more quantities earlier, but overall the impact is minimal definitely in comparison to what the others are experiencing.

Got it Okay and then.

I guess I wanted to also ask about sort of the gross margin in the quarter.

And you know it's a you guys are running I think north of 83% for a lot of quarters. There now you're kind of below that threshold I think you'd been investing more in your scrubbing centers, but can you kind of talk about.

Yeah. The gross margin performance in what has that down a little bit year on year, and then you know how you see the outlook for the balance.

Yeah.

Yeah, I think overall, it's a it's a mix between our product and in cloud security and subscriptions, obviously, we're investing a lot in building and scaling our cloud security infrastructure is demand is strong and that that has some minor not big.

A year impact on our gross margin so.

We are guiding around 82% gross margin would think for the time being that's a that's a conservative way to think about it and as we scale. There is an opportunity obviously to improve that.

Great. Okay. Thank you guys very much.

Thank.

Your next question comes from the line of Andrew King Laconia Securities.

Hey, guys. Thanks for taking my question congratulations on the debt quarter I, just wanted to dive a little bit more into the growth of the Ara metric since you've been reporting has been slowing slightly going from 12% to 12% to 10% now 8.

You.

Can you just give us a little bit more color into that trend.

Yeah. It's it's obviously at the total gross rate is a balance between our device or appliances service attached contracts and on the other end the subscription and the cloud contracts we have so yeah. We.

So you'll see us they've noted very strong growth in cloud and subscription continued to be 27 per cent and scaling every quarter. We did have a weekend service attach oh.

Cortes predominantly driven by 1 large customer that decided although the refreshed our device.

Continues to a next generation devices in the meantime, they're staying without a valid support go on trucks a week, we see we saw some weakness in the service attached.

On contracts. However, the the cloud then the subscriptions continue to drive us forward.

Great.

And then in your press release during the quarter you guys mentioned, an increase an emergency on board games as a result of <unk> re emerging can you talk about how that balance between emergency onboarding versus traditional sales process was this quarter and how that differs versus historically.

Yeah. So every time, the cyber activities going up and since the start of Covid, It's breaking I think new records every quarter, obviously that impacts the our sales cycles, and specifically makes it more and more strategic and critical for our customers not only to.

To protect but really to even upgrade their protections to do what is considered best of breed or best they can afford.

Everytime do you know of customers is under attack, especially under the dose. It means that they are experiencing downtime in their business and as everyone moving digital and moving all of the assets online that's a huge.

So business interruption in business leased.

When customers are under those on somewhere or under those attacks today they cannot defend it by themselves. There's just no, especially a large customer that was broadly experienced a large attack theres just no way to deal with it and then they need to approach.

Sometimes our competition, but more and more I think us due to our system. So definitely there was a positive.

Impactful debt, but the impact is even bigger because even if they're not if a customer is not attacked.

And directly by themselves they see their cut those day see there it appears in the.

The industry, they see other customers and obviously the understanding of the need and criticality and budget allocation to cyber security is increasing.

Great and if I could just squeeze 1 more quick 1 in here APAC when we saw a nice bounce back in growth do you.

You see those headlines declining or was this just a 1 time bounce back this year.

I think we've said you know.

Answer to say that all of the previous quarters about the declines in APAC, we said that bookings are low.

Looking to our school then it will eventually be seen in the in the P&L as well.

Bookings in Q2 continued to be strong and I think those are ya.

Going to see I don't know if to the extent of Q2, but you're going to see continued growth I think in Asia Pacific.

Great. Thanks, Congrats on the great quarter.

Thank you.

Your next question comes from the line of Tim Obrien with Oppenheimer.

Thanks, guys why is the Americas growing so much slower than the rest of the world and is there an opportunity for that to accelerate somewhat and I just had a follow up also on the bookings.

Yeah overall I want to say on the bookings I know in revenue this time, you'll see a slight.

A very slight growth rates, but those.

Bookings continued to be strong and especially in U S. Enterprise, we didn't have a strong quarter in U S service providers and that impacts the B D. A.

We expect that to change in the second half.

But U S enterprise business continues to be very strong.

And actually lead on.

<unk> global business in terms of cloud business and subscription. So we're very happy with the progress we're doing in North America in the Americas in general and especially on the enterprise business.

A great color and I think you said you had a tripling in new customer bookings.

Bookings.

So I guess that's for brand new customers can you talk about what percentage of your growth usually comes from new customers versus existing or any other color there. Thanks.

Every quarter the vast majority of our business comes from existing customers. This quarter existing customers continues to do very well for us.

But it was really an outstanding contribution from new logos.

Yeah.

Thank you.

Your next question comes from the line of Tavy Rosner with Barclays.

Yeah.

Oh, Hi, this is Chris Reimer on for Kathy. Thank you for taking my question.

You talked about the enterprises are accelerating their digital transformation I was wondering if you are seeing traction for your solutions covering public cloud infrastructures.

Yeah, we we do so.

The main product we have.

As the cloud native protect and that continues to grow its customer base each day at all.

Adding to that in recent quarters also our kubernetes WAF web security product, that's targeting the application infrastructure predominantly in public cloud, but also in private clouds and together.

We feel we have a very strong solution to protect the data plane the application plane the control plane of our customers when they put an application in the public cloud. We have we had very nice wins I I didn't day, specifically talked to them in the in my a rebuild.

Get them marks on that but also their new very nice new logos that day approach.

Broached us as well as growing with existing logos. So we definitely see more and more business specifically into the public cloud in general our large enterprise and I've mentioned some of the wins like this construction company.

Many of the workloads that we serve.

Our across the hybrid environment, meaning some of them are in the legacy data center, and a bigger and bigger portion over time of them are actually residing in AWS, and Azure and DCP and so on and we are protecting all of them all applications across all environments.

So a lot of our customers that are already migrated or all migrating or in various stages of these hybrid infrastructure and we are providing across the board all applications all day and data centers and what I believe is state of the art security.

Uh-huh, Okay, and just is there any color you can provide on the M&A pipeline.

As often emphasized that youre disciplined when it comes to multiples on just I'm wondering how you see the space at the moment.

Yeah, we we continue to be active in that space you know the.

The pricing of private companies does not the I would say it does not help us accelerate the.

The pace of the of taking action, but we continue to look for opportunities.

Mhm, Okay. Thank you.

Your next question comes from the line of Alex Henderson.

Would need them.

Hey, Thank you.

So.

First off great quarter a true.

Nice to see.

I was hoping you could give us a little bit more granularity on the portion of the quarter.

It came from what I would describe as the.

Revenue stream.

Our order stream.

Coming from your partners in aggregate.

I know you don't want to break out individual companies.

She hears from Nokia hears from checkpoint or here's from Cisco, but could you give us an aggregate amount of what's happening with that because obviously, that's a very positive.

Development for you.

Yeah.

It was solid contribution.

When I look on the group in the.

In total and specifically and I think that is also aligning well to the new customer business increase that we had those partners brought to us significant new customers. So I mentioned.

In the Fortune 500 day.

By fiscal I'm that we're the.

I think there were more than 1 in the quarter as I mentioned, the checkpoint, bringing us really global 2000 customer was 1 of the example, I did not mention in my script I think a top 5 global.

Debt placed you know through our check point relationship on multimillion dollar order for.

Our security business. So we continue to see very strong traction in large customers through those partners.

Areas predominantly with Nokia enterprises through.

Checkpoint and across the board with Cisco. So I think that's a core strategic element for us, especially in recruiting new customers and then of course adopting them and growing them.

So did the partnership revenue growth.

Order growth.

Particularly in the cloud piece.

Outstripped the growth of the overall company.

Or is.

Is it growing at the same rate or is it growing less than.

In the cloud.

I don't know I think it's continued to grow strongly if I think of the major deals. We've done all of them I think had a cloud and subscription piece.

He needs that way so I think they are growing they grow very very well with us.

And if you were to look at your pipeline with those.

Is that same pipeline.

That you saw coming into the quarter.

As strong or stronger coming out of the quarter AR has the pipeline strengthened.

And so although we had record quarter, meaning record amount of closings. This quarter were starting with a strong deal pipeline.

So definitely new pipeline generation was very strong.

Yeah.

I assume that given your lack of constraints that youre, not seeing any meaningful or significant.

The change in the amount of time forward that the orders or are being offered and I mean, I know we've talked to a lot of people with.

Constraints on supplies that they've got visibility in orders out 2 to 3 quarters I'm, assuming that's not the case given your lack of constraints is that true.

Yeah.

Whereas in that respect business isn't viewed as usual perfect and then on the pricing side I assume that youre not seeing a meaningful change in pricing either given you're mostly a software company is that also fair.

Correct.

Perfect and then 1 last question if I could.

So as I'm looking at.

The debt.

The various partners can you just give us a rank order of which ones were stronger and which ones were.

Lagged it was with Cisco the strongest are then Nokia and then check or or some other order.

Yes.

I think sales for the question, but unfortunately, I wouldn't I wouldn't know the break at this thing.

Okay. Thank you very much right.

Okay. Thank Philip.

Ladies and gentlemen, I will turn the call back over to Roy to you for any closing remarks.

Thank you all for joining us today than ever.

Great day, Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.

Okay.

Okay.

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