Q3 2022 Radware Ltd Earnings Call
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Welcome to the Radware conference call discussing third quarter 2022 results and thank you all for holding 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 would like to ask a question during that time simply press Star then the number one.
On your telephone keypad to withdraw your question Press Star one again.
As a reminder, this conference is being recorded November 2nd 2022.
I would now like to turn this call over to <unk> director of Investor Relations at Radware. Please go ahead.
Thank you Denise and good morning, everyone and welcome to Rod was third quarter 2022 earnings conference call.
Today, I'll always disappointed president and Chief Executive Officer, and Guy have you done Chief Financial Officer.
A copy of today's press release and financial statements as well as the Investor Kit for the third quarter are available in the Investor Relations section of our website. During today's call. We may make projections or other forward looking statements regarding future events or the future financial performance of the company.
These forward looking statements are subject to various risks and uncertainties and actual results could differ materially from broad, Wisconsin forecast and estimates.
So I suppose 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 and the amount of orders and other risks detailed from time to time.
Hi.
Its findings.
We refer you to the documents the company files its furnishes from time to time with the SEC specifically the company's last annual report on form 20-F as filed on April 11 2022.
We undertake no commitment to revise or update any forward looking statement.
To reflect the events or circumstances. After the date of such statement is made.
So I'm going to turn.
During the call too rosy.
Thank you Scott and thank you all for joining us today.
During the last few weeks of the third quarter, we saw closing delays in some customer deals and an increase in multi phased contract.
In response to macroeconomic headwinds.
These trends expanded globally and the impact of the Dell revenue, which came in below the low end of our guidance.
We expect this environment to continue to impact our business in the short term.
We continue to track the deals that did not close and at this point, we are not aware that any has been lost to competition.
We remain confident in our market position and competitiveness as evidenced by the continued wins, we are seeing in large enterprises across all regions.
We have a healthy pipeline and we see strong activity level amongst us.
And prospects, which continued to be driven by a significant increase in cyber attacks.
Given that we're taking several measures to manage the business and leverage opportunities that will position <unk> for long term success.
First we will continue to focus on and pay to the large enterprise market with our state of the output fiction.
We believe the current environment and spending behavior tempo Ali.
And expect to see strong demand from large enterprises in the future.
We believe there are significant opportunities in the market, even if the deals take more time to mature.
During the third quarter, we closed a multimillion dollar of application security deal with a fortune 500 SaaS company.
We won the deal based on our strong partnership and unique application security capabilities.
Other examples of large enterprise wins include the new logo deal with a leading service provider in Latin America for our complete cloud security offerings.
Our frictionless approach to security was crucial to discuss the billion protecting the complex environment.
In partnership with Cisco, We also closed another new logo deal with a major U S financial services company to provide hybrid cloud Ddos protection with.
We displaced the incumbent who could not provide the level of visibility and protection that the customer needed.
The second measure we are taking is to increase our investment in cloud security and shift resources to our cloud growth initiatives.
In times of financial uncertainty and an increased threat landscape cloud security can help customers boosts their security without committing to larger upfront capex investments.
In response to this market need we are constantly expanding our global footprint by opening more cloud security centers.
During the third quarter, we opened two new centers in Dubai in Italy.
Spend our market share.
For example in the Emirates February new customers already on boarded through the security Center.
One new logo from the financial sector found our cloud Ddos solutions critical to comply with regulations.
Another new logo, which is from the media sector moves from a private to public cloud and wanted to strengthen their application protection.
Other new logo, which we won't jointly with checkpoint was from the Education Center. This customer both our cloud WAF. Following a demonstration of our advanced capabilities and was convinced and rather a technology advantage, especially considering the local cloud center.
The third step, we're taking is reallocating resources to expand our footprint in the medium sized enterprise market.
The cyber security reef and needs of the mid market are identical to the needs of the large enterprise market.
However, the capacity and skilled talent.
Market companies have to manage to a security environments are more limited.
Our fully managed cloud security services are a great fit for this market as evidenced by the significant number of medium sized enterprises that are choosing our cloud application security offering.
To leverage this opportunity we are targeting mid market security needs by expanding our channel relationships and offering cyber protection through a cloud first approach.
And lastly, we're taking measures to fine tune, our operational expenses to ensure our business is profitable with strong positive cash flow from operations.
This includes reallocating internal resources to focus on cloud growth initiatives, and making focused investments on long term growth opportunities that we expect will lead to better returns.
As we look at the state of the cyber security landscape. We believe there are several market forces playing to our advantage.
First the number and level of sophistication of Ddos WAF and bot attacks continue to increase.
Accuracy relentless.
Organizations will continue to invest in protecting the critical applications and infrastructure and we believe <unk> has the right offering to ensure the best protection for them.
In fact in the third quarter Gartner recognized blood work for each application security solution.
And it's critical capability for reports Dove now once again ranked rod we're the number two solution out of 14 companies for API security and develop use cases as well as high security use case.
According to Gartner is auto provides a robust set of application security controls and offers one of the stronger API security offering on the Wap market.
Second companies continue to struggle to achieve consistent high quality application security.
According to our multi cloud application security report, 70% of respondents are not confident in their ability to apply security across on Prem and multi cloud platforms and.
And 64% said that they don't trust the security offered by public cloud platforms in short more organizations are looking to have a dedicated application security solution in the public cloud the need that the I believe especially fruit this debate.
While these are challenging and uncertain times I'd like to reiterate that the fundamentals underlying our business are strong our company is healthy with a large and diversified customer base.
And robust balance sheet with more than $400 million on hand.
We continue to generate cash from operations build our annuity business and invest in our cloud security footprint and capacity.
Although this quarter revenue fell below expectations, we expect to end the year with a record revenue with.
With cyber attacks, increasing in complexity and climbing and sheer volume we believe the need for our solutions and specifically real time protection of applications will remain strong.
As we continue to fight for the good guys in the cyber World. We are confident that the other is on the right track and well positioned for long term growth with that I will now turn the call over to Guy.
Thank you Roy and good day everyone.
I'm pleased to provide the analysis of our financial results and business performance for the third quarter of 2022 as.
As well as our outlook for the fourth 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 a GAAP and non-GAAP basis.
Is available in the earnings press release issued earlier today and on the investors section of our website.
Third quarter 2022 revenue declined 4% year over year to $70 5 million.
Compared to $73 4 million in the same period of last year.
As Ray noted, we saw longer sales cycle as well as re sizing some of our large enterprise and carrier customers.
As a result of macroeconomic headwind.
Which affected our revenues across all regions.
Revenue in the Americas in the third quarter was $32 9 million.
Representing 8% decrease in Q3 2022 as compared to Q3 2021.
On a 12 trailing months basis.
<unk> revenue decreased by 1%.
Net revenue in the third quarter was $22 2 million.
Representing a decrease of 6% when compared to the same period of last year.
On a 12 trailing month month basis, EMEA revenue grew by 18%.
APAC revenue increased by 10% to $15 5 million.
As compared to Q3, 2021, and 3% increase on a trailing 12 month basis.
In the third quarter.
Americas accounted for 47% of total revenue.
<unk> accounted for 31% of total revenue and APAC accounted for the remaining 22% of total revenue.
I will now discuss profit and expenses.
Gross margin in Q3, 2022 was 82, 9% compared to 82, 6% in the same period in 2021.
An expansion of 30 basis points are.
Our main gross margin improvement is related to the complete integration of security down partially offset by higher costs related to recently launched cloud infrastructure, coupled with lower revenue.
Operating expenses in the third quarter of 2022 were $53 2 million representing.
Representing an increase of 9% as compared to the same period in 2021.
The increase is predominantly due to additional R&D head count focused on our cloud and <unk> initiatives.
The full impact of security that integration and increase in travel costs.
<unk>.
To improve profitability, we are reallocating internal resources.
Evidenced by head count growth this quarter of only 1% compared to the second quarter.
Compared to Q2 2022 operating expenses decreased by 2% demonstrating our ability to manage our cost structure.
In a responsible manner and in accordance with the market environment.
We continue to strategically look at all aspects of our business and are adjusting our cost structure as needed.
While internally reallocating resources to key growth initiatives and investing in long term programs.
Support our customers' needs and will lead to long term growth.
Net income in Q3, 2022 was $6 7 million.
As compared to $11 million in Q3, 2021.
<unk> adjusted EBITDA for the third quarter was $7 $3 million, which include the negative $2 $4 million impact on adjusted EBITDA After <unk> group.
The decrease in the <unk> adjusted EBITDA is a result of increasing investment in R&D resources.
Okay.
Earnings per share was <unk> 15 compared to 23.
Last year due to a lower revenue in the quarter as compared to last years revenue for the same period.
Despite the declining revenue in the third quarter, we met our earnings guidance, which is a testimony of our commitment to manage our expenses and our ability to navigate the company and generate cash even during challenging times.
Turning to the balance sheet and cash flow items.
We generated $1 5 million in cash from operations during Q3, 2022 as compared to $17 9 million during the same period of last year.
Within the third quarter, we repurchased shares in the amount of approximately $6 million.
And we ended Q3 2022 with approximately.
$434 million in cash bank deposits and marketable securities.
Our strong balance sheet provided us with great Foundation to navigate in the current market conditions and volatility while focusing on long term opportunities to drive profitable growth.
During the third quarters, rather board of directors has authorized an increase of $20 million buyback of the company's ordinary shares and as of today.
The remaining approved buyback budget is $81 million.
I'll conclude my remarks with guidance.
<unk> is a robust company with global team of professionals.
Profitable business model based on critical cyber solution.
Our strong balance sheet and loyal customer base. Moreover.
<unk> for the end of the third quarter grew versus the third quarter of last year, and all of which give us the confidence in the fundamentals of our business.
As we said in previous call.
While a challenging microenvironment, both some uncertainties on customer spending behavior, we expect cyber security demand to remain resilient in the long run.
However, we're still witnessing protracted sell cycle.
And a growing preference for multi phased deployment among large enterprise and carriers. Therefore.
Therefore, we chose to take a prudent approach in the short term.
We expect total revenue for the fourth quarter to be in the range of <unk> $73 million to $75 million.
We expect our non-GAAP operating expenses to be between $54 $556 million.
Given all of these trends and development reviewed earlier, we anticipate Q4 2022, non-GAAP diluted net earnings per share to be between 16 and 19.
I'll now turn the call over to the operator for questions operator. Please.
At this time I would like to remind everyone that in order to ask a question simply press Star then the number one on your telephone keypad will pause for a moment to compile the Q&A roster.
And your first question is from the line of George Notter with Jefferies. Please go ahead.
Hi, guys, thanks very much.
I guess one of the things that stuck out to me was the.
The annual recurring revenue number I think.
I'm looking at a $195 million number I think thats flat sequentially.
I assume theres, some puts and takes in that number but can you kind of talk about why that number was flat and youre not seeing growth in that area.
In the end it's a.
I would say, it's an outcome of the of the revenues.
And I would say the missing revenues translate to debt.
In general we see continuous growth in cloud ALR.
And you'll know more challenging on the product and services side, but we believe obviously that this result is.
Low and should and should improve in coming.
In coming quarters, that's also in line with our.
Increased focus on cloud security that we believe will drive this figure upwards.
Got it.
I assume within that.
I guess I assume the maintenance contracts that are inside that number.
That are on appliances are traditional hardware sales.
Is that the piece that sort of softening and that is getting offset by.
Cloud and product subscriptions, and therefore, youre getting to like a net flat sequential number or is that is that the.
And the dynamic that's going on here right.
Thats exact.
With that we believe it should grow.
Sequentially and of course the overview so.
That is definitely in our model, but we believe that with heightened level of revenues plus even more focus on cloud security as we've noted in the.
In our prepared remarks that should drive a faster growth of the cloud piece too.
<unk>.
Overshadow any decline is happening on the men on the maintenance contracts.
Got it and then can you give us a cloud services and product subscription <unk> growth number I think last quarter, you told us it was 18% year on year I'm just curious what that was this quarter.
It was around 12%.
Got it Okay I'll pass it on thanks, guys.
Yeah.
Your next question is from the line of Alex Henderson with Needham. Please go ahead.
Great. Thanks.
So can.
Can you just talk about I know it seems mundane but.
Obviously, you've got a very large cash balance and with interest rates going up.
All three point increase in interest rates.
Would add about $8 million here.
To your numbers.
Once it's fully rolled through can you talk about a little bit about.
How you expect.
The interest income line.
The trend.
Is the two for $5 million.
In the third quarter the run rate.
How will it step up as interest rate benefit going through your balance sheet.
So we expect.
More or less same.
Income from interest in the coming quarter to $42 5 million.
Third quarter, we also mentioned in the.
Our prepared comments commentary that we will continue to do buybacks.
We will use some of the cash for buyback.
So.
Just mechanically I mean interest rates have gone up a lot more than 3% and probably going to go up another three quarters today.
In the U S.
Can you talk about how that.
How you are structured against that on a year.
Maturity is going to roll over the next three or four quarters.
We hope to have a little longer maturities on that.
Those investments discussed some some.
Sentiment.
So strategically we're shifting to shorter maturity.
Sure.
Balancing between convertible bonds and.
Investing in just.
Putting the money in banks for six and 12 months, which currently yield even higher interest in.
And bonds.
Actually.
Fills in in our investment policy so.
So we're shifting more towards short term level.
Okay. So.
Yes.
Looking out to next year, you're not going to get.
Okay.
A nice uptick in the interest income.
Pretty big number I mean, we're talking about.
On your cash and short term investments.
Three point swing, which we've already seen as an $8 million change and it's not it's not trivial so is that not going to step up.
$267 million in 2003.
Oh definitely next year, we expect a step function in.
Income from interest and obviously it will grow as interest rate, even if interest rates will stay as it is today.
Alright, we still had gone back.
Perfect.
And and convertible bonds from the past.
What portion is variable.
What do you mean very low.
Well, we will roll over the next three to six months.
So, let's say about half is still based on.
Let's say convertible bonds.
Have lower interest rate.
Okay. Thank you.
Going back to the competitive landscape it does sound like.
EMEA is under a lot of pressure.
Pretty clear that.
Conditions, there are going to get worse over the next couple of quarters.
<unk>.
As winter comes in.
The economies continue to decelerate.
So can you remind us a little bit just what's your position is in terms of what portion is in.
In EMEA is local currency base and what what portion is.
Priced in dollars.
The revenue is all in.
It's 100%.
Yeah.
Yes close to 174.
Okay, and then going to the operational.
Environment can you talk about pipeline.
And.
To what extent <unk>.
Been an erosion in the pipeline or whether that is still robust.
How are we.
Setup as we go into the next couple of quarters given.
The pipeline generally is 369 months.
Kind of structure.
Structure.
So I would classify the pipeline is very robust.
Very close to record levels, if not at that level.
And it's a.
And it's driven also by the delays in closing some deals so its not only the the creation.
That continues and depends on the region might be more challenged or less challenged but also because of delays of closing that obviously increases the current pipeline, but the overall pipeline is robust.
Sort of activity deals that we think are.
Turing and as I've mentioned, we did not see competitive pressure on.
Losses on the on the on the pipeline so going forward at least.
Trying to not to put aside the sales cycle or the lengthening sales cycle, we feel very good about the pipeline.
One last question, then I'll cede the floor.
Multi phased deployment, how big an impact as that.
And how does it.
How does it manifest.
I'll give you an example of.
<unk>.
Well for an expected carrier deal that we had four four mobile protection.
Initially there were talking about doing 30 mix.
In one short around $3 $5 million of product deal.
They ended up with saying, Okay. We'll do 10, Max first one third the next year as we deploy the mix et cetera, we will do another one in maybe towards the end of the or the after another and so they are <unk>.
The supply chain budget.
Whatever they are failing their own deployments and their phasing our orders so in that case abroad.
Our broadband build outs generally.
Create immediate impact on revenues of course for US immediate recognition is moving from $3 <unk> to $1 2 million.
Thank you.
Hey.
Okay.
Your next.
One is from the line of Tim Horan with Oppenheimer. Please go ahead.
Thank you I think you said some large customers are re sizing.
Im assuming theyre grooming or trying to cut their expenses can you elaborate on that a little bit more.
Yeah, I think so first I just gave an example of those.
<unk> et cetera, we are.
We are seeing for example customers that instead of taking the full cloud security solution at one short trying to stage. It for cloud and then some appliances et cetera. We were used to I would say that all of that in one piece. So it has different shapes and forms but.
Budget.
The budget allocation more.
More lengthening sales and approvals cycles, all of that we see either of the whole deal pushed or some of the deal getting booked and then delayed now we don't see it across the board.
We see it in very large deals the regular mid size deals or even you know.
Medium to large we did not may be yet, but we did not experience there but on the larger commits.
In the very large enterprises or carrier, that's where we see this phenomena.
Yes.
Are you seeing existing customers are they maybe reducing spend on some of their like are they trying to reduce what they are spending with you now for existing customers on either legacy products, not new customers or existing.
We see that also in large existing ones.
For example, the example, I gave from the carriers.
An existing large customer mobile agile the deployment towards slide is new.
But over there we do see that phenomenon.
Got you so any idea how long the slowdown from last year.
Companies go two years without really investing is it a two quarter phenomenon.
What are you kind of expect on timing.
So I would split it to where we are part of a new infrastructure built.
And then it might be on the long side because it depends on their plans for a new data center or deploying a five G et cetera, et cetera, and then I would say.
We are aligned to the overall business environment and investment.
Capabilities. So that's one and on the other end when it's serving this thing infrastructure in existing business I don't think it can be delayed too much because the actors in the cyber activities there.
So you can delay budget you can.
Try to resize the towards the feet memorial current needs versus buying we're three years ahead of time et cetera, et cetera, but the investment you would need to make otherwise you would be vulnerable. So I think the heightened cyber activity levels.
Would actually accelerate budget spend in our areas as long as the.
You'll know belongs to existing infrastructure existing applications et cetera, I think it's hard to delayed too long.
And lastly, I know you haven't lost any deals, but have you seen a step up in activity on the competitive front either either from Hyperscale.
Or any other competitors.
No no.
No I think we're doing quite well on the competitive landscape actually I know it does not show in the current quarter numbers, but in general.
We've seen especially in cloud our win ratios going up in the last three four quarters. So we feel good about the competitive positioning I mentioned Gartner report we have other reports.
Attesting to the same and very strong customer references and Gartner peer insights et cetera. So on all the competitive front, we feel good we do need to take the steps we've mentioned going more cloud.
Strengthening the mid market.
To accelerate our growth.
Thank you.
At this time there are no further questions I will now turn the call over to Roy for any closing comments.
Thank you very much all for attending and have a great day.
This does conclude today's conference call. Thank you all for joining you may now disconnect.
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