Q1 2022 Radware Ltd Earnings Call
Ladies and gentlemen, thank you for standing by today's conference call will begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
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Okay.
Ladies and gentlemen, good morning, My name is Abby and I will be your conference operator today.
At this time I would like to welcome everyone to the Radware conference call discussing first quarter 2022 results and we thank you all for holding.
As a reminder, this conference is being recorded on May 3rd 2022.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one once again.
I would now like to turn this call over to you Scott Erez director of Investor Relations at Radware. Please go ahead.
Thank you Ed Good morning, everyone and welcome to <unk> first quarter 2022 earnings Conference call.
Joining me today are really disciplined president and Chief Executive Officer, and Guy <unk>, Chief Financial Officer of course, yesterday's press release and financial statements as well as the Investor Kid. The first whatever is available in the Investor Relations section.
During today's call, we may make projections or other forward looking statements regarding future events or the future financial performance of the company.
The forward looking statements are subjected last week.
The uncertainties and actual results could differ materially from <unk> current forecast and estimates.
So that could cause or contribute to such differences include but are not limited to influx from the COVID-19, pandemic general business conditions, and our ability to address changes in our industry changes in demand for products. The timing isn't the amount of orders and other risks detailed from time to time is rather exciting.
We refer you to the documents the company files and furnishes from time to time, we get to see specifically the company's last annual report on form 20-F filed on equity 11, 2022, and we undertake no commitment to revise or update any forward looking statements in order to reflect events or circumstances.
After the date of such statements you've made I will now turn the call.
Thank you Scott and thank you all for joining us today.
I'd like to begin our call by highlighting the news we released this morning, introducing skybox security.
Which is a spinoff of our cloud native business.
This is a strategic step in the cloud services initiatives that we announced a couple of months ago.
Before I get into the details about Sky look first let me take this opportunity to recap our cloud initiatives.
Given the large market opportunity in front of us in protecting mission critical applications and data centers against IBM.
We made the strategic decision to focus our investments and accelerate our growth in the cloud security as a service space.
In addition to the scale spinoff, we've taken several other important steps in delivering on these initiatives.
First we acquired security, our cloud Ddos scrubbing center provider to leverage assets and synergies and deliver a better service to our cloud.
Are the customers.
During the first quarter, we successfully completed the integration of security does.
Second we recently increased the cloud service capacity of our global network to 10 Terabits per second.
This quarter, we are once again working on expanding our capacity and network footprint to meet incremental demand being driven by the growing volume of cyber attacks and the growth in our customer counts.
Third we are expanding our innovation center in India to drive double security research and development as well as service delivery excellence.
Together with our easily R&D site, we are focusing on cloud innovation is.
Part of these innovations efforts, we recently launched <unk> secure.
Our game changing new cloud application security architecture.
The other <unk> bus.
Signed to deliver what our customers need for consistent high grade Securities.
Offers centralized security management for applications deployed across multi and hybrid cloud environments.
Its unique out of past deployment options remove the need for any inline component from the data path to reduce complexity and reduce latency eliminate routing changes and increased availability.
Finally, as I mentioned earlier today, we announced the launched of scaled security.
They're running as a separate entity skyhook will have the ability to operate with even greater sales marketing and product focus as well as speed and flexibility.
<unk> Global management is making a $35 million investment in <unk> and <unk>.
We intend to scale and strengthen scaled position and unlock even more security value for customers.
Cloud native protector delivers a comprehensive view of the cloud security posture and uses machine learning algorithms to provide mis configuration detection.
Lyons assurance and malicious activity alerts.
It is that cloud native threats in real time and provides automatic detection and response.
Our commitment and focus on our cloud business is reflected in our first quarter financial results.
Revenue in the first quarter grew 10% driven by our cloud and product subscription business.
We also recorded double digit growth.
Growth in both operating income, which increased 28% and earnings per share, which increased 11% to 19.
Several noticeable cloud application security wins contributed to our first quarter results.
We closed a large cloud web application and book management deal with a multinational fortune 500 company in the financial industry space.
This company is responsible for thousands of public facing websites on behalf of its clients.
Web sites that were under constant attack.
This financial service leader was looking for new solutions due to the lack of autonation efficacy and visibility and it's got in deployment.
Our win was a cross sell deal from a very large ddos swing we had.
Couple of quarters ago.
We also signed the cloud Ddos deal with a global system integration and information technology company that wanted to secure the infrastructure against attacks in several key geographies.
The company was looking for a solution provider with a large global presence that could deliver a best in class cloud Ddos solution.
We won this deal with our partner Airtel.
Ddos attacks were front and center last quarter more than doubling compared to the first quarter of 2021.
This heightened cyber environment also led to some large first quarter weeks.
For example, we won a large ddos deal with a major brand known for its global communication and collaboration solution.
This customer network increased massively in the last couple of years and as a result, it became a target for hacking attempts.
They needed more granular mitigation for dozens of global data centers.
And we proved our protection capabilities.
This is the first deal we closed with Brazil, a new partner that we announced in the first quarter.
The continued demand for more powerful Ddos mitigation led us to develop and launch the industry's first therapy.
Ddos mitigation platform, our defense Pro 800.
The platform offers enterprises and service providers.
Protection and performance built to handle <unk> high bandwidth demands and deliver next generation connectivity for emerging environments.
Our development innovation not only continued to help us close noticeable deals, but also earn industry recognition.
<unk> recently received two cybersecurity Excellence awards.
Our application protection as a service solution, which includes cloud based WAF, both management API security and Ddos protection.
As a silver winner in the application security category.
And our cloud native protector was a gold winner in the cloud workload protection category.
Industry analysts also continued to recognize <unk> innovator in the industry.
And it sparked metrics analysis quadrant named <unk>, the technology leader for both management for the second year in a row as well as the leader in the western markets.
In summary, I'm very pleased with the strong start of the year with.
We've made great progress on our cloud initiative, where we are laser focused on execution.
We just announced the spinoff of Skyhawk, we acquired and successfully integrated security them we.
We continue to innovate and develop cloud solutions and grow our cloud services footprint to ensure our customers are protected against the mounting number of cyber attacks.
I want to take this opportunity to thank our employees around the world for their contribution in achieving another successful quarter.
As most of you know a few months ago, we announced <unk> done as our new CFO I want to welcome Guy to his first earning call with leather.
Sure.
Thank you Roy and good day everyone.
I'm excited to be here today for my first earnings call at <unk>.
We look forward to meeting many of you at upcoming Investor events.
I'm pleased to provide the analysis of our financial results and business performance for the first quarter of 2022.
As well as our outlook for the second quarter of 2022.
Before beginning the financial overview I would like to remind you that unless otherwise indicated all financial results are non-GAAP .
A full reconciliation of our results on GAAP and non-GAAP basis is available in the earning press release issued earlier today and on the investors section of our website.
We started 2022 on a high note with 10% growth in revenue for the first quarter of 2022, reaching $73 7 million in revenue.
Compared to $66 8 million in the same period of last year.
Revenue growth was driven primarily by our subscription business.
Total IRR increased 9%, reaching $192 million in the quarter and was also driven by cloud and subscription.
Which grew 20% year over year.
Looking at geographies.
First quarter 2022 revenues in the Americas totaled to $29 5 million, a decrease of 12% versus the first quarter of 2021.
Trailing 12 months revenues in the Americas increased by 5% over the previous period.
We saw strong growth this quarter in EMEA and APAC.
EMEA grew by 33% to $28 1 million and APAC grew by 34% compared to Q1, 2021, reaching $16 1 million.
For the trailing 12 months revenue in EMEA increased 30% and APAC, 12%.
Americas and EMEA accounts for 40% at 38% of total revenue respectively. In APAC account for the remainder of 22% of total revenue.
I will now discuss expenses and profit.
Gross margin in the first quarter 2022 was 83, 2% compared to 82, 4% in the same period in 2021 and.
An expansion of 80 basis points.
Our gross margin improved is mainly the result of security them integration offset by higher costs related to cloud.
Infrastructure and supply chain.
Operating expenses in the first quarter of 2022 increased by 9% to $51 7 million.
Impaired to the same period in 2021 due to additional head count.
Including security than personnel, joining our R&D team.
And related costs as well as increase in marketing and travel costs as covered impact decreased.
We continue building out the company's infrastructure to support a sustainable revenue growth given the significant market opportunities, we see in front of us.
Operating income grew by 28% to $9 6 million compared to $7 5 million in Q1 2021.
And operating margin increased by 180 basis points to 13%.
The increase in operating margin is a result of revenue growth, reflecting our leverage in the model.
As we highlighted in previous call the decline yield on marketable securities and a positive impact on our financial income, which decreased from $1 9 million in the first quarter of 2021 to 800000 in the first quarter of 2022.
We expect our financial income to remain at the server level at the same level in Q2 2022.
Earnings per diluted share for the first quarter of 2022 increased 11% year over year to 19.
Resulting from the growth and operating margin improvement.
Turning to the balance sheet and cash flow items.
Cash flow from operation in Q1, 2022 was negative $10 million compared to positive cash flow from operation of $16 million in the same period of last year.
Cash flow from operation was impacted mainly by $21 million extra ordinary tax payment that will partially return in the future.
We expect to generate positive and healthy cash flow from operation in the remaining quarters of 2022.
During the first quarter, we repurchased shares in the amount of approximately $23 million and completed our full 2021 80 million share buyback plan.
We ended Q1 2022 with approximately $397 million in cash bank deposit and marketable securities.
Before turning to our guidance I would like to join ROI and welcoming Tiger global as an investor in Skyhawk.
We plan to capitalize on the large addressable and fast growing market opportunities ahead of us.
Skyler.
Agila, which is focused on carriers add security market will operate as a separate company.
Catering to market that are adjacent to <unk> core business.
To report on the progress of the Hawks companies, we will provide aggregated update on our quarterly investment predominantly based on R&D expenses during future earnings calls.
I'll conclude my remarks with guidance.
For the second quarter of 2022, we expect total revenue to be in the range of 75 million to $76 5 million.
We expect our operating expenses to be between $52 5 million to $54 million.
With that Q2 2022 diluted earnings per share is expected to be between 19 and 20.
I'll now turn the call over to the operator for questions.
Operator.
Thank you.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile our Q&A roster.
We will take our first question from George Notter with Jefferies.
Yeah.
Hi, guys, thanks very much.
Yes.
I would love to hear more about the rationale behind the spin off of the cloud Native protection business.
Maybe you could kind of give us more on that in terms of.
What's in it for your customers.
How does that affect <unk> financials I'm interested in how many employees are moving over.
And then how do you plan on kind of showing shareholders.
The value of that investment going forward. Thanks, a lot.
Okay. Let me, let me start with the rationale so as we mentioned the cloud native protector, we focused on public cloud security.
The the customers. The main customers we have for this product line are different than the large enterprise in areas that we have in the other.
Product lines of <unk> customers and also the competitors are a different set of competitors.
As we've mentioned in our cloud initiative, we really want to be very very focused on cloud security as a service the ddos dwarf the API both security for all our customers and therefore, we thought that it makes a lot of sense for us to.
<unk> of the public cloud security with its different set of focus areas. This will enable us to.
Attracts startup based island.
Skyler.
Company.
Two one it's very similar to our fast growing somewhat with feedback.
Company, we think that would be the best in growing the business, providing our customers with faster development and better product line.
Down the road.
So that's on the I would say on the on the logic.
Behind it to drive more focus on the Rod we're on the Colorado side and it allows us to run faster on the public.
<unk> security market.
Regarding.
And how will we show it in future financials Guy would you like to.
Yes, so on the earnings call we will.
Talk about the Hawks as an aggregator so we will.
Disclose the.
Expenses actually the investment in both skyhook and agile and on the annual we will open it as a segment.
Youll be able to see.
The complete <unk>.
Well of the Hawks group.
Got it Okay and then.
How does this change your head count just out of curiosity and then also what was the head count in the company at the end of the quarter.
So head count.
In the quarter was 1264.
It doesn't really change the head count as of today in the future as Roy mentioned, we expect to accelerate.
The growth on all scale.
Round 30 people moved.
<unk> predominantly in R&D.
Product management delivery functions.
Got it okay, great and then the step up in headcount I assume is in part.
Driven by the security dam integration is that correct.
Right.
If you compare it.
To December 31st out of the 121 growth close to seventies attributed to security them.
Okay, Okay, Okay I'll pass it on thank you guys.
We will take our next question from Alex Henderson with Needham <unk> Company.
Thanks, Tim.
So am I reading the balance sheet right that you guys are contributing $30 million in cash to do this.
Operation.
Okay.
No we were not investing in that operation.
So I think the balance sheet, what do you see.
What you see there is with Guy mentioned is the tax.
<unk> and the buybacks those are the main and the security Dam acquisition.
Those are the impact on the balance sheet.
Okay, I just wanted to clarify that.
Just the basic groundwork.
Upfront.
UK of Ukraine Russian exposure.
Would you quantify whether you have any.
Do you have any receivables or any other issues on that front that you need to.
To write down.
No nothing to write off.
Alright, so no exposure on revenues.
Exposure on receivables.
And has there been any change in the EMEA.
Environment.
And either terms of.
Yeah.
Expected pipeline or closure rates or anything of that sort as a result of.
The macro confusion to the geography.
Okay.
In EMEA, we see very good business trends so.
We saw some activity in the neighboring countries around cyber security and the nation level, obviously people are very concerned.
But in general we didn't see interruption or any of the implication and the business activity in EMEA in general.
Okay.
Broadly speaking if you look at your pipeline of business.
Globally.
Are you seeing any change in.
And the condition of matter is improving as a result of increased cyber threat or slowing down.
As a result of macro considerations.
Relatively growing in the same in the same space.
Nothing specific.
Okay.
No real changes in that context, okay great.
Going back to the operations a little bit.
The.
Pricing environment.
Been one of <unk>.
Significant price increases across most of the networking space.
I realize that you guys are more software oriented in particular, that's where a lot more of your growth is coming from.
But have you seen any changes in the pricing environment.
Are helping you gain some share or.
While creating some opportunity and are you doing anything on pricing.
Yes, we didnt see major changes in the pricing environment.
We did execute.
Sure.
A single digit price increase in select models.
Towards the end of the quarter as I think we've discussed.
Time, obviously, if at all it takes some time for that to get into revenues is.
And or do some 90 90 days initial period and then also it depends on specific customer contracts and mix et cetera. However, we did made some price list increases it's not affecting good Q1, and I don't think there will be any significant impact on Q2 overall we didn't.
The major pricing difference towards the market, we obviously see it.
A different pricing environment in the components, which increases our cost, but that's how I would characterize the current environment.
Okay.
One more question.
In terms of.
Partnerships, particularly the Cisco partnership, which is obviously our largest.
Can you give us an update on what's going on with partners.
By the year seeing an acceleration of share within.
That.
Those partners, particularly Cisco.
Is that contributing to the numbers here.
Yes.
So I think a couple of points I would like to highlight versus previous quarters. So first I think we continue to advance on the strategic level with our key partners.
And embedded Moreover, our offerings into the portfolio.
I believe this will be seen in coming quarters.
Also in the market. That's one second we are also now.
Correcting some of the channels.
To us so based on those relationships of checkpoint and Cisco, who were able to go to key retailers in the market.
Create a very.
Good incentives to represent the hardware and the full portfolio.
I think for example, Presidio that I've mentioned in my comments is a very good example procedures one of North America biggest Cisco channels based on our relationship and their ability to get ready.
Full <unk> sales through Cisco. They also took our offering.
Directly.
The end to end and we've issued a very strong less release in a very nice activity in the market together with them. So now we're starting to capitalize on those OEM relationships also to build on the border channel. This initiative is it's still early but I think it's another broadly seeing.
Capability that we gain through those partnerships.
Does the a stream.
<unk> time to deliver other products in the Cisco suite or other systems companies suite in those partnerships.
Have an impact on the timing or the scale of what you're selling into them.
Either because people choose to go with your products considering there are available.
And shippable and that increases our attractiveness to a salesman or.
Because negatively they can't sell the rest of the systems that are involved with a project and therefore delay the timing on your project products.
Any impact either way as a result of supply chain pressures on the partners.
Yes, So I think the fact that we have those cloud solutions I think that's a positive for our partners because.
Put aside our ability to deliver also the appliances their mindset is the appliances on our products our ability now to supply.
To sell and it's better to move to cloud solutions to accelerate the ability to.
Two invoice and complete projects. So the fact that we are well represented with our cloud solutions and Cisco and checkpoint I think helps us.
In that and on the other end I can tell you that although we can supply equipment. We did see very few I don't want to we didn't want to highlight that I don't think it impacts our results in.
In a significant manner, but since you left the fact that large infrastructure projects are delayed sometimes mean that.
We cannot supply also ours, because if our security products sitting on top of switches and routers and those switches and routers are not going to supply in the next six months.
Customer doesn't want to accept also the security appliances, because there is nowhere to connect them to.
So we did we did see some very large I would say infrastructure project that phenomena, but overall, we don't see the impact our ability to ship.
Hey.
As well as the growing.
The scope of our cloud services is assisting us in navigating those those times.
Alright, so is it a net positive or a net negative.
So I think for the China for our pulp mills that are positive, but we can do for them.
Okay. Thank you very much.
And we will take our next question from Tavy Rosner with Barclays.
Hi, Thank you and your any okay.
Yes, Hi, Greg Hi, Thanks for taking my questions.
One last follow up for me on the type of deal.
I'm curious why seeking an external investor when you have.
Quite.
Significant cash position. So I'm just wondering from your perspective, what we see.
Thank you Erez.
As it needs to be.
So the operation in terms of value contribution.
Okay. I think you know from from our point of view with achieved several key points. One we wanted to make sure that the Hawks Jochen and Sky Open. This case skyhook Israeli seen by Thailand by customers is up.
As a real Standalone startup company and for that we wanted to have in <unk>.
Good one.
We see.
To join US that's one second I think it's also important for our shareholders to get this external valuation.
An indication we could of course continue to invest in finance leads from our own resources, but I believe this highlights the current expectation.
All steel one receives from what this business can become to indefinitely. The valuation the seat today. So I think it's also important for our shareholders to get this external validation.
Okay understood.
And then touching on the U S market.
You mentioned the decline on.
This quarter versus last year that Judy mentioned in the trailing 12 months was growing mid single digits.
When you look at your pipeline.
Or coming quarters, how comfortable you are about.
The USD.
So we expect all our regions and obviously the U S to grow.
On a yearly basis, there might be fluctuations in specific quarters, but we do believe North America will continue to grow the field as well, we do want to see an accelerated pace of growth there while we highlighted the.
Last 12 months is a 5% growth is definitely an opportunity for us too.
To do better and we are focused on achieving them.
Okay got it and then lastly on subscription.
Can you give us a sense of how much comes from new business.
Converting some of your existing entre.
<unk> customer.
And in our cloud business very lethal.
Immigration from an on Prem to.
To cloud.
So if a customer for example was already discussed the marine the on frame, we will generally compliment that that implementation with our cloud Ddos on demand to create what we call the hybrid cloud hybrid ddos offering which is by far the strongest most protecting.
Ddos solution out there and you see our largest customers are utilizing this hybrid architecture, so thats on Ddos.
And in the cloud application security both API.
We predominantly play only the cloud security as a service play we are not moving.
Customers with on Prem WAF to the cloud so there is no cannibalization or movement.
And so all the businesses new deployment into the cloud environment.
Great. Thanks for the color.
Thank you.
And we will take a follow up question from Alex Henderson with Needham <unk> company.
Thanks.
So.
Im looking at the numbers for the.
For the full year and I know you don't want to.
It really give guidance for the full year, but.
So kind of all over the map.
The revenues.
Range.
Pretty tight but on the EPS side Theres a bunch of people.
And the kind of the mid seventies.
Estimates as high as the dollar per share.
Can you characterize how you are thinking about.
The.
The full year, maybe not necessarily giving specific guidance because I know you don't want to do that but.
What are you thinking in terms of.
This year in terms of the overall environment spending versus the overall environment on growth, if we assume kind of mid <unk>.
Singles to high singles growth for the year, or our 8% to 10% or whatever you want to talk to.
What are you expecting in terms of the margin side of the equation.
<unk>.
To help us.
Bring that very wide splay of numbers into a tighter range.
So again I think we discussed it also in previous calls the leading indicator for.
For our CAGR is actually the IRR, so as long as it's growing.
Eight 9% thats pretty much going to be our growth in the coming quarters.
We still see a very healthy market a lot of opportunities.
New investment and expansion of investment in infrastructure and definitely we will enjoy this expansion.
Regarding.
Opex.
Again.
We're seeing a lot of opportunities and as a result, we will add more head count both in sales and marketing and R&D to capture these opportunities.
So.
EPS should not improve dramatically.
Okay. So just to put that in context.
2021 was surround 81.
I think there was kind of a bias to actually a little bit of contraction.
Higher.
And now you have edged up a little bit in both the March and June quarter, So kind of flattish EPS for the year is kind of consistent with that.
That commentary.
Again, we're not guiding for the year. So this is let's say.
Too much information.
Thanks.
Yes.
Okay can't blame a guy pretrial okay. Thanks.
Okay.
Thank you.
And there are no further questions at this time Mr. Ryan. This is bill I'll turn the call back over to you.
Thank you everyone for joining us and have a great day. Thank you.
And this concludes today's conference call you may now disconnect.
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