Q4 2022 Radware Ltd Earnings Call
Good morning, and welcome to the Radware conference call discussing fourth quarter and full year 2023 results. Thank you all for holding as a reminder, this conference is being recorded February eight 2023, I would now like to turn the call over to you Scott you Roose director of Investor.
Relations at Radware. Please go ahead.
Thank you operator, and good morning, everyone and welcome to Rod was fourth quarter and full year 2022 earnings Conference call. Joining me today are always disciplined approach attendant, Chief Executive Officer, and Gary Dunn Chief Financial Officer.
Yesterday's press release, and the financial statement as well as the Investor Kit for the fourth quarter are available in the investors section.
Our website.
During today's call, we may took 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 Atlas current forecast and estimates.
Factors that could cause or contribute to such differences include but are not limited to impacts 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.
And Rod was fighting.
We refer you to the documents the company files and 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 in order to respect events or circumstances. After the date of such statement is made.
Before I turn it over to really I would like to remind you that we are hosting a virtual investor and analyst meeting on February 22nd which will include executive presentations and updates if you haven't registered and would like to do so please email us at IR I'll draw the word that's cool.
I will now turn the corner to really see status.
Thank you Scott and thanks to all of you for joining us today.
Today, we report the despite the challenging macro environment. We ended the fourth quarter of 2022 with $74 million in revenues and 17 cents of UBS.
These results were driven once again predominantly by our subscription and cloud business.
Trend that we expect will continue as we shift to a SaaS model and grow over yellow faster than total revenues as we close 2022, we continue to see longer sales cycle and multi phased contracts as we noted in previous quarters.
Despite customers being more cautious with short term spending there are four reasons, we remain optimistic about our long term growth.
First cyber attacks are not only increasing in terms of sheer numbers, but they're also more powerful frequent and complex.
This creates a critical customer needs and market demand for our solutions.
Second the rapid transition to the cloud also continues to generate demand.
Multi cloud environments expose customers to configuration and visibility issues and introduced gaps in protection. We solve these challenges by offering consistent security across cloud environments. So applications are protected regardless of where they are running.
The third reason for our optimism is the accelerating pace of digital transformation.
The speed in which applications are developed and introduced has become a competitive advantage.
To securely manage this process organizations are looking for frictionless security solutions that support innovation without getting in the way of business.
This is a need we are well positioned to meet.
Fourth our sales team is ramping up to drive growth in North America, where we just hired a new head of sales.
We are focused on growing our footprint in the midsize enterprise market and working with our channels and OEM partners to win new logos we.
We've reallocated resources and made adjustments to enable the teams to capitalize on these opportunities.
While we remain confident in our future growth prospects. We also recognize that security like other industries is not fully immune to economic downturn.
Two tight budgets with the critical need to secure their applications. We believe more companies are opting for cloud deployments fully managed services and vendor consolidation trends, we're serving very well with our solutions.
The growth engine behind our 2022 performance is our cloud and subscription Alo, which grew 14% year over year.
Up from 12% in the third quarter.
We won a record number of new customers in the fourth quarter across all cloud security offerings, particularly among midsize enterprises.
Let me share with you a few examples of our successful cloud bookings in the fourth quarter.
We signed a large deal with a fortune 500 pharmaceutical company for the hybrid cloud Ddos solution.
The customer experienced a large ddos attack and was looking for a solution to support multiple sites and automatically mitigate zero day attacks.
We also expanded our cloud security business with an existing financial services customer.
This customer was using our hybrid cloud Ddos protection service and added our cloud WAF and Bot manager.
This customer was being cheap by web application in both the tax and appreciated our seamless onboarding integrated security and the ease of use for our cloud security portal.
In another large cross sell deal we expanded our relationship with a leader leading banking group in Europe .
They were already subscribed to our cloud Ddos and cloud WAF and now added our bot manager.
As we enter 2023, we are laser focused on scaling our cloud security business.
Security provides our customer with a significantly stronger security solution, while it maximizes customer value and improves our visibility and long term profitability for us.
To that end, we intend to expand our footprint in the midsize enterprise market grow our channel partnerships and enhance our cloud security offerings.
We have several new cloud security offerings in the pipeline that we will announce soon.
To further support our global cloud business, while helping our customers reduce latency and meet regulatory requirements. We also continue to open more cloud security centers.
Last quarter, we launched a second center in Australia.
Wanting Oakland, New Zealand and wanting Toronto, Canada.
During 2022, we opened eight cloud centers for Ddos and WAF and increased our mitigation capacity to 12 therapies.
Our cloud security offering as a best of breed offering and it continues to earn us industry recognition.
For instance squadrons knowledge solutions named <unk> the leader in its 2022 spark metrics reports for both management.
According to the report rather both manager offers comprehensive capabilities in the industry widest mitigation options.
And Ethan of Oracle group named gradually do recognizing us as a best in class provider for Bot detection and management, we received the highest marks for vendor stability and client strengths.
Beyond the strengths in our cloud business, our fourth quarter performance was backed by our on Prem security business. We closed a very large deal with a tier one Asian carrier.
This customer experienced a massive ddos attack, causing hundreds of organizations to go offline.
They chose <unk> to replace the incumbent due to our comprehensive security solution strongest delay and enhanced functionality.
We also landed a large deal with a major U S communication platform company.
This customer was it with costly Ddos attacks, which also created extended outages for their carrier resellers.
We wonder business with our Ddos solution and our expertise in protecting voice and video over IP attacks.
In closing.
We are laser focused on the cloud security opportunities in front of us backed by our expertise and our broadening cloud security offerings, we are well positioned to grow our cloud of yellow and expand our addressable markets in 2023.
At the same time, we remain mindful of the macro environment and disciplined in our expense management. So that we can deliver profitable growth.
Coupled together, we believe we're going to continue to grow our <unk> and profitability in 2023.
Yeah.
I would like to take this opportunity to thank our employees worldwide for their contribution and we look forward to more success in this new year.
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 fourth quarter and full year 2022, as well as our outlook for the first quarter of 2023.
Before beginning the financial overview I'd 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 earning press release issued earlier today and on the investors section of our website.
Fourth quarter 2022 revenue declined 3% year over year to $74 $1 million in line with the midpoint of our guidance as compared to $76 6 million in the same period of last year.
Full year revenue was $293.4 million, an increase of 2% compared to the full year 2021.
These results were achieved despite the current macroeconomic environment that we experienced since the second quarter is still witnessing today.
As we highlighted in previous quarters, the micro headwind impact our customers' spending and result in alligator cell cycle budget scrutiny and multi phased deployments.
In 2022 top line was driven by our cloud and subscription business revenue, which increased 13% in 2000 $22 million to $105 million and accounted for 36% after the revenue in 2022.
Up from 32% in 2021 and 26% in 2020 as.
As far as the annual recurring revenue totally our Ara grew 7% in 2000 $22 million to $202 million and.
In cloud and subscription they are accelerated to 14% growth in the same period.
We expect to scale, our cloud and subscription business to improve visibility and profitability. Despite revenue headwinds in the short term as a result of the shift towards subscription based business model.
On a regional breakdown revenue in the Americas in the fourth quarter of 2022.
Increased by 2% to $32 million.
Compared to Q4 2021.
For the full year 2022 America revenue decreased by 4% to $124 million.
Compared to the full year 2021.
As Roger mentioned in his prepared remarks, we are working in multiple fronts on improving execution in the U S and expect to see improvements in the second half of the year.
EMEA revenue in the fourth quarter was $24 million, representing a decrease of 18% when compared to the same period of the last year.
For the full year 2022, EMEA revenue grew by 6% to $104 million compared to 2021.
The performance in EMEA is related to the macro headwinds that we are experiencing globally since the third quarter.
APAC revenue in the fourth quarter increased by 14% to $18 million compared to Q4 2021.
And 10% revenue increased to $65 million for the full year 2022 compared to 2021.
Americas accounted for 43% and 42% of total revenue in the fourth quarter and full year 2022, respectively. EMEA accounted for 33% of total revenue and 36% in the fourth quarter and full year 2022, respectively and APAC accounted.
For the remaining 24% and 22% of total revenue in the fourth quarter and full year 2022, respectively.
I'll now discuss profits and expenses.
Gross margin in Q4 of 2022 was 82, 7% compared to 82, 4% in the same period of 2021.
For 2022 gross margin expanded by 60 basis points to 83%.
The gross margin improvement is related to the successful integration of security them offset partially by higher costs related to recently launched cloud security centers.
Operating expenses in the fourth quarter of 2022 were $54 $9 million slightly below our midpoint guidance representing.
Representing an increase of 5% compared to the same period in 2021.
Full year 2022, operating expenses increased by 8% compared to 2021 and totaled to $214 million.
The increase in the operating expenses is a result of additional R&D head count.
The full impact of security dams integration and an increase in salaries.
Due to the current macro environment, we are mindful of our expenses and we are committed to improve our profitability in 2023.
Net income in the fourth quarter was $7 $7 million as compared to $10 3 million in the same period of last year.
Full year net income was $31 $3 million compared to $38 $3 million in 2021.
Adjusted EBITDA for the fourth quarter, and full year was $8 $2 million and $37.7 million, respectively, which included $3 million and $8 $5 million negative impact for Q4 and 2022, respectively.
On adjusted EBITDA After Hawks group.
Diluted earnings per share for Q4, and full year 2022 was 17 to 68 cents, respectively compared to <unk> 22 and 81.
In Q4, and full year 2021, respectively.
Turning to the balance sheet and cash flow statement.
During Q4, 2022, we generated $9 6 million in cash flow from operation.
Compared to $28 9 million during the same period of last year.
And $32 1 million in the full year 2022, compared to 71 $8 million in 2021.
Cash flow from operation in 2022 was impacted mainly by $21 million extraordinary tax payment.
We'll pause to be returned in the future.
During the fourth quarter, we repurchased shares India amount of approximately $12 3 million and $59 $5 million during the full year 2022.
Out of the $100 million share repurchase plan that we have in place.
We ended the year with approximately $432 million in cash bank deposit and marketable securities.
I'll conclude my remarks with guidance.
We believe that our current cash position and agile cost structure will help us cross the current environment.
And come out stronger we expect total revenue for the first quarter of 2023 to be in the range of $70 million to $73 million we.
We expect Q1, 2023, non-GAAP operating expenses to be between 53 and $54 $5 million.
As for our Q1 2023, we expect non-GAAP diluted net earnings per share to be between 12 and 15 cents.
Before I turn over the call for Q&A I'd like to invite you to our virtual investors and analyst meetings.
Taking place on February 22nd during the event, we will provide additional kpis along with long term model.
I will now turn the call over to the operator for questions.
Operator please.
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.
Our first question comes from Chris Reimer with Barclays.
Hi, Thank you for taking my question I know you mentioned already.
<unk>.
Slower sales cycles and the multiples.
Finance, but I was wondering if you could comment on any color any customer behavior, you've seen from last quarter to this quarter. If anything has changed in particular or maybe in a particular segment.
Yes, Thanks, a lot groups for the question so we.
We didn't see much deterioration in terms of the end.
Of the behavior I would say that we've seen it may be more areas you know Europe maybe.
Maybe a bit stronger than we've seen.
We believe though that our ability to move some of those deals into cloud and subscription deals will actually provide us with bigger.
Bigger long term value for these customers so while in the short term we are seeing obviously the heath of the multi phased approach.
Less large capex deals available and we believe it's actually the right time to accelerate the transition to <unk>.
To subscription and as Guy mentioned get out of it stronger.
Mhm, Okay and.
Regarding the new partner program, you announced recently.
Can you give some color on how that differs from your previous partner relationships and how how does that fit into your overall strategy and in reaching into the mid size enterprise market.
Yeah, absolutely so.
The new program beyond the regular anchored channel program is heavily focused on cloud security. So.
A lot of the reward.
Kickbacks and marketing fund the certification.
And so on are centered around the ability to execute and promotes together with.
The cloud security solutions.
So this is the major I would say change in shifting focus we've done beforehand. It was mainly based on the total revenue generated over a year and we were not I would say differentiating between product line or cloud versus capex.
Tyco business. This program is heavily skewed to cloud security as a service.
Regarding your question how does it fit our overall strategy as we've mentioned and you've mentioned in your question, we want to expand our business to the mid sized enterprise, we feel we're doing very well and you heard some of the new wins in the very large enterprise in the Fortune 500, we have a very significant.
Sure and successful track record however, with the cloud solutions. It is clear to us that every mid sized enterprises required the same level of security, but could not afford the capex budget.
Cloud security, which is in our case also fully managed.
The <unk> with the midsize enterprise is very very good. If you just think about the savings on the on the head count cost and the expert costs that we offload with our fully managed solution.
It's a very very attractive offer to that segment.
That segment can only be served through channels and dedicated channels to cloud security. So hence the launch of the partner program is in lockstep with our strategy to increase.
In the fleet size and provide them with other steps we've taken in the last three or four months to achieve that.
Great. Thank you that's very helpful.
Tony.
Our next question comes from Alex Henderson with Needham.
Great. Thanks.
Can you give us a little bit of a sense of what your expectations are for sales and marketing and.
In other Opex lines.
In terms of growth in FY 'twenty.
23, a year.
No you don't want to give full year guidance, but just some indication of.
Are you planning on holding it steady.
Benefiting from the exchange rate.
<unk>.
Decline year over year, therefore, you're able to offset.
Cost increases are you planning on investing in front of revenues.
To position for 'twenty four.
What's the strategy for it.
So hi, Alex So first you know yourself from the guidance, we guided opex to be between <unk> 53 to 54 and a half.
Which is lower than the Opex, we posted for Q4 that was around.
$55 million.
Thanks, you do two things one is we did some.
Changes in head count, we lowered head count from Q3 end of Q3.
To the end of the year by around 20.
The real impact is.
There's going to be in Q1 and throughout the year.
And the second thing you touched already that's the FX hedging so.
The hedging position in 2023.
<unk> versus U S dollar is going to be more favorable than the hedging position we had in 2022.
So again not talking about the year, but we expect lower opex in Q1 versus Q4.
We also mentioned in the call that we're going to keep.
And agile structure.
To a recession is going to be longer than expected we can.
Adjusted expenses and vice versa.
Are we going to grow faster than expected we can.
Adjusted Opex too.
The new goals.
Two two line items that are pretty difficult for people to forecast outside of.
The company.
The interest income line and the tax line I assume the tax line is still around 15%.
Is that accurate on the interest line.
Assuming that the solid cash balances are going to get much better interest.
Our rates.
They rolled.
Rolled to the new rates over the course of the year, we've got it up around $14 million. Thank.
Thank you are 657.
A range in 'twenty, two if I remember correctly, so is that enough.
The right ballpark and can you give us any help on those two lines, which are pretty tough to forecast externally.
Yes, so taxes.
To forecast in 2014% to 15%.
Regarding <unk>.
Interest, we expect interest income to continue to grow throughout the year. So.
Looking at close to $2 5 million in Q4, we expect an increase quarter over quarter based on the same cash position.
As a result of a higher interest rate than based on.
Like about security is that going to be open throughout the year and we are going to close on a better interest.
Okay. One last question and then I'll see the floor.
The new products that you're talking about launching.
Are you anticipating those to benefit.
Our results this year or should we be thinking about a six to nine months.
Cell cycle, which would imply that it's more of a 'twenty four benefit.
And certainly nice to see.
Announcement to get new products is always good, but but not so much impacting twenty-three revenues is that fair way to think about it.
Yeah, So so I think.
Yeah.
You know, what we'll be able to give obviously more color on that on the analyst day.
However, some of the announcements we believe definitely will contribute to D C revenues.
And as you said some of the announcements.
But you might expand our offering they might take a bit longer to ramp. So we have a mix of new announcements that they think of strengthening our solution portfolio very much in some we do expect to contribute to revenues.
Okay, great. Thanks.
Good day to day here, you guys voice again.
Look forward to the analyst day. Thanks.
Thank you Eric.
Okay.
Our next question comes from Tim Horan with Oppenheimer.
Thanks, guys.
When you're doing cloud security for mid size enterprises or are you also doing their on Prem security are you how.
Are you already doing on Prem for these customers and extending it into into cloud just understanding the dynamics or is it a bundled sale at this point.
So generally the midsize enterprise.
It was not able to afford our on Prem solutions. So you can think of Nevada, where the security solution.
The minimum investment would be close to $100000 over.
So and that's without the cloud component. So generally for the regular midsize enterprise that would be above the the budget they could have allocated to that.
To that business so in that market, we're actually looking for a cloud service.
Dilution, where the cloud security as a service the those swaps.
Security will all delivered from the cloud on a subscription basis and this is why this has become relevant as our cloud security solution and become stronger more scalable available in more markets. We feel that this market is now open to us while in the past it would seem.
<unk>.
Not a good fit for our product portfolio.
Got it and through your cloud first solution you can cover the entire enterprise needs, both on Prem and off Prem.
Correct correct. So from the cloud security, we can serve both the on Prem applications and the public cloud applications through the same infrastructure all of that is going to a unified fully managed by the same emergency response team.
We actually provide those enterprise was consistent.
Alrighty across any form factor and we know that the midsize enterprise double digit transitioning cluster.
To the cloud in the low to the public cloud and the large ones, but definitely more open to cloud security as a service.
Got it and that's irrespective if they're moving to it doesn't matter if they're moving to a large hyperscale cloud provider and not by your cloud solution will cover their needs no matter what.
Exactly.
Got it.
That's really helpful and do you see can you talk about you know what.
The typical mid size enterprises would pay and do you see much.
There are any churn from a mid size enterprise using the solution.
So midsize enterprise mites.
What might be 25% to 30000.
And for a solution, but that solution might encompass both web security and Ddos, So a broader set.
No.
And then around the 100 K.
But covering all the application and the security API security and Ddos need.
As mentioned in my remarks, and Q4, we won.
A record number for us.
Cloud customers, so we actually already starting to see those.
Mid size enterprises coming into us in Onboarding.
Service and so we believe there's something very interesting here for us and something that can provide as guy mentioned long term visibility profitability for the whole business.
And I guess Theyre generally taking all three of the primary products or I guess, how many more options where they have like if they.
If they took all your products what would that how many options would that represent.
Yeah. So.
Let's leave something for the Analyst day, I think we went out and said that.
Got it and then just last I'm back to the macro impact.
Do you think do you think things have bottomed a little bit are we stable like it sounds like you're maybe is improving are you are you seeing any any improvement out there.
So it's hard for me to say no one.
Our business in.
I think it.
Maybe.
That's an accurate statement, but when I read the global headlines you know from the Hyperscale players from the large tech companies and so on it seems that it's still deteriorating. So I think we need to be very cautious at this point and then follow closely.
The market looks like lumber.
Look forward to the analyst day. Thank you.
Thank you.
Our final question comes from George Notter with.
Jefferies.
Yeah.
Hi, there thanks very much guys.
Maybe you could talk a little bit about what youre doing on the sales front in North America, I think you mentioned, you're reallocating resources and.
Maybe shifting head count around can you just talk about more directly exactly what you're doing there. Thanks.
Yeah, Hi, George So several of the things we've done so first we hired and he joined US a new head of sales for North America. Please already.
On board.
Second we mentioned we are targeting more the meat side.
Enterprises now I want to balance that we continue.
All of our enterprise sales team to focus on the large enterprise obviously, we're doing very well there is a very important market strong customer base very loyal to us growing with us we use so it's not that we're shifting from the largest you didn't need what we've done we've rationalized some of the investments on the larger enterprises.
To continue to cover them fairly well and continue to.
To gain more customers and grow the existing one and with the buildup of the budget, we've allocated that towards the mid size. So we've added more marketing inside sales.
And channel salespeople to focus on the on the midsize enterprise with that then.
I answered previously we've launched.
More focused cloud oriented channel program and more resources to the channel to boost.
And that's more or less.
Last but not least I think we're working now more and better also with some of our OEM partners. For example, I'm talking to you today for a month's bill down where we are at Cisco live.
And we do see also.
Think enhanced.
Momentum there that we think also would help us towards the physical commercial segment or the mid size enterprise and as well as diligent. So we've done several things I think we have a.
We have a good plan and a solid plan and we are now executing.
Got it great and then also I wanted to ask about your investment in security centers. I think you said you added eight this year.
Any sense for how many you expect to add in 2023.
And then also I assume that.
Dilutes your gross margins to some extent I assume that the new security centers as they come online there.
Lightly utilized.
What do you think the margin impact is for the company as a security centers come up to a more normal types of utilization rates.
Yeah. So.
At this point I would say at least the same amount in.
It may be more you know, we're seeing some markets open and.
Any markets that.
Asking us for more investment in opening in opening those local markets. The reason to open up a cloud security center is generally not technology, but in many cases regulation.
More countries more financial institutes want to keep the data and the customer information within the country. So it's not about the latency, it's not about the scale, it's mainly because of <unk> and similar regulations that dollar.
That's all driving that so it is we want to play in more markets. We are still in the buildup phase and adding those.
At the same time the centers that we open are gaining more popularity in the amount of customers applications are growing there. So on one end that improves our gross margin as we scale with the existing location and like you said the new centers.
Have a drag on gross margins, so far I think even with the supply chain and the cost issue of components. I think overall, we were able to manage it really well you'll see our gross margin as a whole although of course, we're seeing.
The costs are increasing.
In the hardware.
And the build out of.
Data centers all of that being taken into account, we were able to manage the gross margin pretty well.
I expect that to continue.
Over the long run.
I think that that's what you alluded to.
Cloud network is becoming bigger the marginal impact of building additional set of data center will become smaller.
Got it okay, great. Thank you and then last one for me.
You mentioned.
The financial impact from the Hawks, I missed that earlier, but could you tell us what the EBITDA.
Impact was from the Hot businesses and then also curious on the revenue impact. Thanks.
Yes.
And the numbers, we gave before so we said the.
EBITDA for the quarter was $8 2 million and for the year.
$37 7 million.
<unk> and.
Attributed negative EBITDA.
<unk> 3 million and eight 5 million for the quarter and the year, respectively. So yes.
He also translated for the core EBITDA core EBITDA.
It was $11 2 million for the quarter of $46.2 million for the year.
The impact of the Hawks on revenue is really marginal.
That will give me give me another opportunity to invite you to our Investor day, we will breakdown between the Hawks to agile and is scale and we will disclose more information regarding.
The P&L of both companies and their contribution.
Rotary consolidated financials.
Super Thanks very much.
Thank you.
There are no further questions at this time I now turn the call over to Mr. <unk> for closing remarks.
Okay. Thank you very much for joining us today, and we look forward to seeing you assuming our analyst day. Thank you.
Yes.
Okay.
Yeah.
[music].