Q1 2023 Radware Ltd Earnings Call

Speaker 2: Thank you, gentlemen. Welcome to the Radware conference called discussing first quarter 2023 results and thank you all for holding.

Speaker 2: Today's conference is being recorded and online has been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone CPAD. If you would like to withdraw your question, press star one once again. Thank you, and I would now like to turn the call over to Yisca Ares, director of investor relations at Radware. Please go ahead.

Speaker 3: Thank you, Iby. Good morning everyone and welcome to Radwell's first quarter of 2023 earnings conference call. Joining me today are Roe's Disappel, President and Chief Executive Officer and Guyaviddan, Chief Financial Officer.

Speaker 3: A copy of today's press release and financial statements as well as the investor kits for the first quarter are available in the Investor Relations section of our website.

Speaker 3: You are going to this call, we may make projections for the forward-looking statement regarding future events or the future financial performance of the company.

Speaker 3: These fault-locking statements are subject to various risks and uncertainties, and after a result could differ materially from redress current for a custom estimate.

Speaker 3: Tractor that could cause or contribute to such differences include, but are not limited to, if, up to from the changing or severe global economic conditions, the COVID-19 pandemic general business conditions and our ability to address changes in our industry, changes in demand for products.

Speaker 3: We refer you to the documents that companies find and furnishes from time to time with the SEC, specifically the company's last annual report on front 20F as file on March 30, 2023. We undertake no commitment to revise or update any follow-up statements in order to reflect events or circumstances after the date of such statement is made. Our knife now turned the call to Roi-Cisabelle. Thank you Iska and thank you all for joining us today.

Speaker 4: We ended the first quarter of 2023 with revenue of $69 million and earning per share of 14 cents.

Speaker 4: The microchallenges that we experienced in the first quarter were stronger and broad than previous quarters.

Speaker 4: These challenges translated into long-distance cycle, more cautious spending and closing delays across all regions.

Speaker 4: While the macro environment is creating business challenges, organizations remain under pressure as they face more frequent and more complex cyber attacks. Attacks accelerated during the first four months of the year. There were significant attack campaigns against the US health care sector, Canadian government, Australian ports and government websites, Israeli government and banks, as well as airlines and airports in Scandinavia to name a few.

Speaker 4: Russia invades invasion of Ukraine as ushered in a whole new wave of activism that is generally both of them and more determined than ever before.

Speaker 4: Any organization independent of size and industry can become a target for activists who desire to advance their cause.

Speaker 4: According to our recent Threat Intelligence report, three activist groups claimed responsibility for more than 60% of DDoS attacks between February and April . As a result of the escalation in attacks and downtime in enterprise networks,

Speaker 4: with some multiple emergency onboarding to our cloud platform by organizations and attack.

Speaker 4: We estimate that many of the companies that were on board at under attack during the first quarter will convert into longer term customer contracts.

Speaker 4: It's clear that so-called good enough security is not good at all.

Speaker 4: You need best-of-breed security and hardware by any technical and

Speaker 4: We believe that while security purchasing decisions might be delayed, they can't be ignored indefinitely without creating added business risk and exposure.

Speaker 4: that our fully managed cloud security solution offers, continues to give us confidence in our positioning and long-term growth prospects. Just last week, I attended the RSA conference. Compared to 2022, we saw a significant increase in customer activity. We believe this is one more indicator that the increasing cyber attacks is driving a critical business need and causing organizations to rethink and repiooritize security spending despite budget scrutiny.

Speaker 4: and doubling down on our cloud security offerings. During the first quote, the subscription booking crossed for the first time, 50% of our total booking highlighting our progress. Furthermore, we are pleased to report strong cloud security business. We recorded close to 30% of the growth in cloud total booking, strong growth in the total number of cloud customers, many of which were meet size enterprises.

Speaker 4: And in addition, as I highlighted before, we sought 21% growth, either over here in the cloud manner. Hello.

Speaker 4: Our cloud performance was backed by several major wins.

Speaker 4: For instance, we released new algorithms to mitigate web-didos attacks, a new AI algorithm that automatically detects first positive and first negative and supervises our cloud systems. We strongly believe our algorithms are an important competitive differentiator and in lockstep with what customers need in order to withstand the type of attacks we're seeing today. In addition, we rolled out our new best of suite offering for the cloud application protection.

Speaker 4: which delivers seamless 360 degree application protection from the user's browser to the application.

Speaker 4: This best of suite offering includes Cloud DDoS protection, CloudWaf services, API and bot management. And it also includes our newly introduced client-side protection solution, which secures the less protected and seldom monitored client-side supply chain.

Speaker 4: During the first quarter we also introduced our next generation DDoS mitigators, defense pro-X.

Speaker 4: and Radro-Cyber Control-L, a new state of the art management security operation and in the orchestration system.

Speaker 4: Together, this next generation solution combines industry leading performance with enriched usability and visibility to defend against encrypted attacks and application layer divos attacks in real time.

Speaker 4: Defense Pro X uses our hardware mitigation engine, rather internally developed high capacity security FPGA. Leveraging the HME, Defense Pro X is the fastest and most scalable mitigation platform in the market today. Its superior performance and scale provide us with long-term competitive advantage. Our state-of-the-art solutions continue to earn us industry recognition.

Speaker 4: In the first quote of our API discovery solution and secure pass architecture, one gold cybersecurity excellence awards for innovation and leadership in application security.

Speaker 4: SecurePass also received honors when it was named a gold winner in the 2023 GLOBE Cybersecurity Awards for its innovative approach in ensuring security in the digital age.

Speaker 4: In closing, while we experience strong macro headwinds, we believe that the slowdown is temporary.

Speaker 4: We are confident that organizations will have to resume investments in real-time attack mitigation and cyber protection, regardless of the environment.

Speaker 4: In order to capitalize on future opportunities and to be the natural cybersecurity provider of choice for organizations, we are determined to grow a strong and sustainable business with a core focus on our fully managed cloud security offerings.

Speaker 4: We remain mindful of the macro environment and disciplined in our expense management so that we can deliver profitable growth.

Speaker 4: With that I will now turn the call over to Guy.

Speaker 4: Thank you, Roy, and good day, everyone. I'm pleased to provide the analysis of our financial results and build performance for the first quarter of 2023, as well as our outlook for the second quarter of 2023.

Speaker 4: Before beginning the financial overview, I would like to remind you that unless otherwise indicated, all financial results are known gaps. A full reconciliation of our results on the gap and on gap cases is available in the the era

Speaker 4: and on the investors section of our website.

Speaker 4: The decline of revenue was on the back of ongoing and increased macroeconomic environments that we have experienced since the second quarter of last year, and which intensified in the first quarter of this year. The impact of the macroe environment is still evident in elongated cell cycle, as well as budget scrutiny and extended multi-phase deployments. As Roy said, and as we are witnessing for some time, levels of attacks are growing consistently in the last few years. However,

Speaker 4: These attacks are not fully expressed yet in the demand of organization for our cyber solution due to budget cuts and the results of macro uncertainties.

Speaker 4: Add the micro headwind.

Speaker 4: Our cloud visa was strong in the first quarter. Cloud ARR in the first quarter of 2023 grew 21% year over year. Similar to the growth in the fourth quarter 2022.

Speaker 4: and accounted for 27% of total ARR compared to 24% last year.

Speaker 4: The growth of our cloud business is also reflected in our recurring revenues that increased from 68% in Q1 2022.

Speaker 4: The growth of our cloud business is also reflected in our recurring revenues have increased from 68% in Q1 2022 to 73% in Q1 2023.

Speaker 4: As we highlighted in our event today in February this year, we are focused on scaling our Cloud business and accelerating its growth to improve visibility and profitability. On a regional breakdown, we are focused on scaling our Cloud business and accelerating its growth to improve visibility and sustainability.

Speaker 4: On a trailing 12-month basis, America's revenue decreased by 2%. We are working on multiple fronts to improve our execution in the U.S. as we highlighted in the investigation. We are expanding our relationship with OEN, building the mid-sized market infrastructure, and applying self-force changes. We believe that these actions will lead to an improvement of performance by the end of the year.

Speaker 4: In our revenue in the first quarter increased 6% compared to Q1 2022 to $30 million and it was flat on a trailings of one basis.

Speaker 4: APEC revenue in the first quarter of 2023 was $12 million compared to $16 million in the same period of last year, representing a 24% decrease year of the year and a 3% decrease on a trailing 12-1 space.

Speaker 4: Americas accounted for 39% of total revenues in the first quarter, EMEA accounted for 43% of total revenue and APAC accounted for the remaining 18% of total revenue in the first quarter.

Speaker 4: We are now discussing profits and expenses. Ross margin in Q1 2023 was 82.3% compared to 83.2% in the same period in 2022.

Speaker 4: During this time of microchallenges, it radiates a mindful of its expenses and its agile to adjust its cost-structure and needs. Our flexible structure and ability to align expenses with the changing market condition will enable us to come out stronger. We are committed to improved profitability over time. Operating expenses in the first quarter of 2023 were 52.4% million dollars below our lower end guidance. Representing an increase of 1% compared to the same period of 2022.

Speaker 4: and a 5% decrease compared to Q4 2022. Operating expenses decreased versus Q4 2022.

Speaker 4: He decreased the increased the increase is mainly due to a 3% head count reduction. The National income grew gradually in the last year.

Speaker 4: In the first quarter of 2023, financial income was $2.7 million, an increase of $1.9 million from Q1 2022.

Speaker 4: This increases the trick is to higher interest rates in the market.

Speaker 4: Net income in the first quarter was $6.1 million as compared to $8.8 million in the same period of last year.

Speaker 4: Right, we're adjusted a bit up for the first quarter with $6.5 million, which includes $2.7 million negative impact after hocks.

Speaker 4: The loaded analytical share for Q1 2023 was 14 cents compared to 19 cents in Q1 2022.

Speaker 4: Turning to cash flow statements and balance sheets. Cash flow form operation in Q123 was negative $1.2 million, compared to negative cash flow from 10.5 million dollars in the same period last year.

Speaker 4: The cash flow for operation in the first quarter of 2023 was impacted mainly by the increase in trade and other intervals and decrease in other pace growth.

Speaker 4: During the first quarter, we repurchased shares in the amount of approximately 12.7 million out of the 100 million dollars share repurchase plan that we have in place. We ended the first quarter with approximately 400.

Speaker 4: and 19 million dollars in cash, tax deposits and marketable? tils?

Speaker 4: I'll conclude my remarks with guidance.

Speaker 4: We believe that the current macroeconomic will remain during 2023 and although we cannot estimate the timing, we believe that our current cash position and agile construction will help us cross it stronger than others.

Speaker 4: Expect all revenue for the second quarter of 2023 to be in the range of 68.

Speaker 4: to $70 million. We expect Q2 2023 non-gap operating expenses to be between $62 and $54 million. As for Q2 2023, we expect non-gap deluded net earnings per share to be between 12 and 15 cents.

Speaker 4: And now turn the call over to the operator for questions.

Speaker 2: All right, please. Thank you. And at this time, I would like to remind everyone in order to ask a question press star than the number one on your telephone keypad. We will pause for just a moment to compile the Q and a roster.

Speaker 5: We will take our first question from Alex Henderson with Meet-Em. Your line is open. Great. Thanks so much. Just looking at the guide per second, can you give us some sense of what you think your interest rate, tax rate, will do?

Speaker 4: interest rate to continue, financial incomes to continue to grow based on current interest rate.

Speaker 5: And actually have any guide for the interest income for the 2Q.

Speaker 4: No, we haven't guided. The only thing we said is that we expect to continue to grow more or less the same pace as we did in the last quarter.

Speaker 4: and tax rate same as before.

Speaker 5: If you could just remind us where how you're positioned against the FX obviously the shekel is

Speaker 5: quite weak as a result of the political turmoil there. So how are you positioned on that?

Speaker 4: We are hedged for the rest of the year, so Louis Ryszakl versus US dollar FX should not

Speaker 4: impact our P&L. That's it for next year we're not headed yet.

Speaker 5: All right, and then going back to the numbers, it looks to me like the US was the particular problem, but it also looks like...

Speaker 5: The problem was heavily skewed to service provider in the quarter. So can you talk a little bit about what's going on with that vertical? Because obviously it was a big part of the overall decline here and significantly worse than...

Speaker 5: with heavily skewed to service provider in the quarter. So can you talk a little bit about what's going on with that vertical? Because obviously it was a big part of the overall decline here and significantly worse than the overall decline.

Speaker 5: the corporate averages, is that a function of the shift in the business mix away from you know what you've traditionally done for them and therefore we should expect that to continue and when does that flatten out?

Speaker 4: So I think the several factors. First we saw overall weakness across the globe. Yes, America was weak, but I can tell you that was our feeling also on the rest of the theaters. Second, we're definitely now more geared especially with the focus on cloud security.

with this and obviously carry your deals tend to be larger than to be capex and therefore you know we I think we saw it also there in loud magnitude. I think also loud and the price capex deals suffered but this is masked by our cloud performance.

So I think in the interior there's nothing to cover the reduction in the in the? occupancy? the components.

Just to clarify, when you said we globally on demand, that was not company-wide, that was a comment about service providers specifically, right?

No, I think company-wide. You know, we...

I think company-wide, you know, we... So company-wide, is company-wide weak globally and also in service provider? Yes, yes.

If I could just one more question here.

As I'm looking at the mechanics of the U.S. business being down...

How do you expect that to progress over the course of the year? When does the realignment there start to improve things? From a number point of view, we didn't see that in Q1, but from other measures and other KPIs.

to engagements, to pipeline and so on. All in all, we feel better about the US organization, we feel better about pipeline creation. I mentioned also the RSA and the customer activity.

You know, while Q1 was difficult, we're actually feeling way better going now into Q2 and beyond.

And Q1 was difficult, we were actually feeling way better going now into Q2 and beyond.

Thanks.

Thank you Alex.

And we will take our next question from George Nauter with Jeff Rees. Your line is open. Hi guys, thanks very much. Yeah, I guess I wanted to expand on that. You guys have made a lot of changes, I think, in the sales organization. I know you've changed a compensation plan. You're reorienting folks around.

more medium-sized enterprise deals, obviously the cloud products. Could you talk a little bit about what the early returns are there in terms of the new comp plan and the changes you're making? Any more you can tell us would be great.

Okay, so first, obviously it's early to say, but if I need already to look at one figure, the booking of subscriptions in Q1 for the first time crossed 50% of our total booking. So we definitely saw an internet loss for about 26 days.

some of our sellers in growing quantity focusing on everything that is subscription, more than a regular product. So that we are already seeing I think also a very strong pipeline and activity in cloud as a result of that because we're highlighting.

not only subscription but cloud.

covered in the analyst day. We'll see how it's progressing but so far I think it's

Got it. And then I know you made some changes to the Cisco OEM relationship also. I know that they included Radware in their enterprise wide license agreements. Can you talk about what you're seeing through that channel?

Yeah, it was a very good quarter with Cisco. We actually, beyond revenues, which I think were a record level, we're seeing a lot of activity in the field. So there's really a big pick up in activity in a...

in deals, in engagements, in events.

As you've mentioned, we're now part of the Enterprise Agreement of Cisco, so we're seeing the Cisco Security Team engaging in discussions with their customers under those frame agreements to include the other portfolio in. We have also the Turbo accounts that we're working to get, the large accounts of Cisco that we're working to get.

us a sense for how big that is.

Is that on the horizon? I hope so. I hope so. We are progressing. We are progressing well. Let's see as it grows more what is the right time.

Okay great, thank you very much guys. Thank you George. We will take our next question from Chris Rimer with Barclays. Your line is open.

Hi, thanks for taking my questions. I wondered if you could touch on the process for onboarding the emergency customers. You said there was an uptick this quarter and a few more of those. Can you just walk us through the process of how they get onboarded? How long can they...

remain customers until they do become an actual customer and what kind of traction do you see in them converting as a permanent customer.

Yeah, so generally, thanks for the question, so generally when we're talking about an emergency onboarding, we mean that the customer is under attack. When they're under attack, they probably are down, meaning their applications are down, their network is down, and there's especially didn't do sufficient traffic.

towards their data centers and applications. The onboarding process

It can be very quick, meaning it can be done in an hour. And definitely can be achieved in several hours. The critical factor there is receiving a letter of authorization from the customer to its ISP that Radwork can act.

on the network as behalf of the customer. So we can behave as if we are the customer network. Once this is done, it's quite immediate to onboard the customer to our network.

As we are onboarding and protecting them, we are providing around a week to 10 days. To them to experience the service following that, there is an expectation to conclude the contract. Now, some enterprises, especially the loud ones, the processes are longer, in some government entities, the requirements for other fees.

But definitely the fact that A, they onboarded our network, B, the service was proven in real time, in production, is a major benefit. So we are seeing anywhere between several days of turnover time or conversion time to several months. And it's a...

Very delicate matter, you know, if we're seeing that it's not progressing and budget is not there, do you take them off the service, do you give another grace period, how do you manage that? But overall, you know, customers that are coming into attack are converting with very high probability, especially if we are very, very good in what we do and we're really saving them.

So I think the latest activity that was predominantly started mid-February and accelerated in terms of cyber attacks in March and more so in April is definitely generating, I would say, pipeline with high probability to close, which I think is a good...

It's a good outcome for us, obviously. Got it. Thanks. That's really helpful. And just following on your comments around...

The reorganization in the US and getting to the point where you feel execution is optimal. Looking at the other regions, do you see that execution there is also optimal or might there be need for reorganization in the other geographical areas as well?

are going to market, but it's not going, at least it's not on our plans, currently to do any restructuring or sales and organization. Thank you. Thank you. We will take follow-up question from Alex Henderson with Needham. Your line is open. Yeah, if I could go back to that service provider question for a second. So, are you in fact delivering stuff to...

in the security space to the service providers, or is that more your traditional business that's going over there? Can you talk a little bit about what you're selling and how you see, how you define those service provider category? Yeah, so I think the three buckets there. So first we're selling the application delivery controller to the carriers predominantly to the right.

network services organization, to load balance and do traffic management for key applications. So that's the first bucket. The second bucket we sell our high-end mitigation devices.

security DDoS mitigation devices when they are generally using them on their network to clean DDoS attacks.

Those are generally large projects, large graphics.

The third is we are delivering our mitigation devices and our web application firewalls to their MSSP businesses.

to those carriers that are engaged in an MSSP business, although they obviously depend about the traction with their customers. If they grow it, if they scale it, they will probably purchase more. If not, they would not need more capacity and more solutions. So those are the three buckets that we are...

engaged with the carriers, I would say that the major headwind is on the first two buckets, the ADC and the large security mitigators, those are the large CAPEX equipment purchased by the carriers.

Can you give us any sense of what the scaling of these three are? Are these similar sizes or is the ADC business actually the largest piece? How do we think about this scaling?

I think actually the DDoS mitigation is the largest piece for the networks. Also there I believe they cannot hold those purchases for long because attacks are growing and the capacity that they need is growing. And with this we do see increases in pipeline.

in this segment, we just didn't see a lot of purchases that were actually done in the first quarter. But I don't believe they can carry on with this approach for long because it's against the dynamics we see in the market, more capacity and more attacks.

I see. Okay, I get the gist of it. Going back to the pipeline comments you made earlier, it sounds like you felt the pipeline was improving, at least in the Cisco piece and somewhat in the U.S. piece. Can you comment on the company-wide pipeline? Has

You know is the linearity during the quarter an issue? I.e. did you know the late March time frame with all the financial debacle cause a perturbation in the closure rates and but your pipelines are healthy? What's the flavoring there?

The pipeline is improving, so we feel better about that. I think also the

You know the velocity of the pipeline especially those that I've mentioned that are triggered by attacks those deals

Generally, our accelerating faster to close. So all in all, I think the quality of the pipeline and the velocity is better.

As you pointed out, North America, Cisco, those are key areas. Cloud obviously is a key area and so on.

Okay, and so again, was there any impact because of the banking issues that happened in March? Did that perturbate the linearity or cause anything to slide out of the quarter that would have? Yes, it did. It was a little bit of a

you stop whatever closing up here. Any thoughts? I don't know how to say, I don't think so though. None of our, or let's say none of the banks that were impacted were actually our customers, so nothing direct, that being said.

there is some kind of uncertainty in that segment therefore we see the longer sales cycle. A lot of companies doing RIFs, any thought about you know maybe doing something more aggressive on the cost side to mitigate some of the pressure on margins? At this point we don't plan

we think the attacks are creating real need, and we want to be there for the customers. So we are mindful of the expenses, but we believe profitability will grow as we will grow the business and scale back our results, scale up again our results. Great, thank you so much.

are creating real need and we want to be there for the customers. So we are mindful of the expenses but we believe profitability will grow as we will grow the business and scale back our results, scale up again our results. Great, thank you so much.

And there are no further questions at this time. I will now turn the call back to Mr. Roy Visipel for closing remarks. Thank you very much for joining us today and have a great day. Ladies and gentlemen, this concludes today's conference call and we thank you for your participation. You may now disconnect.

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