Q3 2023 Radware Ltd Earnings Call
Welcome to the Radware conference call discussing third quarter 2023 results and thank you all for holding.
As a reminder, this conference is being recorded November 1st.
2023, and all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question during that 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 a second time.
Thank you and I would now like to turn this call over to Scott Wrench director of Investor Relations at Redburn. Please go ahead.
Yeah.
Thanks.
A copy of today's press release and financial statements as long as the Investor Kit for the third quarter are available in the Investor Relations section of our website.
Right.
During today's call 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.
Actual results could differ materially from Rod was current forecast and estimates.
After that could cause or contribute to such differences include but are not limited to.
Some 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.
The timing and the amount of orders and other risks detailed from time to time in roundwood sightings.
We refer you to the documents the company filed its in some shifts from time to time with the SEC specifically the company's last annual report on form 20-F on March 30 <unk>.
Great.
We undertake no commitment to revise or update any forward looking statements in order to reflect events or circumstances. After the date of such.
It is made.
I'll now turn the call to really discipline.
Thank you Scott and thank you all for joining us today.
Before I address our third quarter financial results.
Like to update you on the status of our business operations.
As you know on October seven the always group from Us.
The cell phone Boulder will be slightly resulting in many casualties and kidnappings.
Our heart goes to all the people that lost their loved ones.
People, who were injured the hostages and the people who have gone through the system.
Israel is now fighting to free those who are being held hostage and removed from us.
While this is taking place I want to assure you that the other business operations are working without interruption.
Our global technical support centers, and cloud security services, which span multiple regions with more than 40 points of presence.
Running as planned.
As needed we have reallocated internal resources to cover for a number of employees with <unk> called <unk>.
So at least for the Israeli Defense Force.
Can be assured that AGA has all of the required business continuity plans in place within Israel should they need to be activated.
I would like to thank our customers partners and investors around the world.
The board and the kinds of work during the past three weeks, we do it.
Fully appreciate your spending will be through it.
Additionally, before as a cyber dimension and utterly standing at the forefront.
We are blocking attacks some of Israel critical infrastructure as well as prominent government offices.
Banking institutes and media organizations.
The more we are using the intelligence suite.
Our global customers.
<unk>, we're attacking Israel are also targeting western countries.
With that I'd like to update you on third quarter financial results.
We ended the third quarter with revenues of $62 million and non-GAAP earnings per share of <unk> <unk>.
Last quarter was another strong quarter for our cloud security business, our cloud in <unk>.
25% year over year to $62 $5 million.
Validating both from 21% in the first quarter and 23% in the second quarter of 2023.
In addition, we continued to record double digit growth across bookings, new logos and total customers, including mid size enterprises.
Our cloud growth potential is huge and we are confident in our ability to achieve a sustained karger of 25% growth in the coming years.
Our subscription revenue cloud and product subscriptions have been growing steadily and accounted for 45% of total revenue in the quarter.
Up from 37% last year.
This steady growth is also reflected in our recurring revenue, which accounted for 79% of total revenue in the third quarter as compared to 71% during the same period last year.
We are making steady progress in our transition from an appliance company to a cloud security as a service company.
The strength of our adult security offering is becoming more apparent in the market and to our peers one of our competitors, which was using our ddos appliances in their service decided to terminate our partnership because of the growing competitive situation between the companies.
This decision resulted in an approximately $5 million reduction in total yellow.
<unk> totaled $204 million in the third quarter, 5% growth year over year compared to $195 million in the third quarter of 2022.
When excluding the CLO churn from previous quarters due to the unique nature of this competitive relationship.
<unk> increased 8% year over year, a slight uptick from 7% growth in.
In the second quarter of 2023.
Okay.
In the last few quarters, we've seen a big shift in the threat landscape multiplied by a dramatic increase in layer seven effects also known as web Ddos Tsunamis.
These high volume encrypted attacks bypass traditional web application firewall and network based Ddos.
Entering them ineffective.
Enterprises, such as Microsoft UBS Wells Fargo, and many others were all negatively affected by these effects.
Our new cloud Web Ddos protection service, which is specifically built to combat these attacks.
Become a strong market differentiator for us.
Using our new AI based algorithms are solutions detect and surgically blocks the attacks in real time without disrupting legitimate traffic.
Artificial intelligence is also an emerging area of opportunity for <unk>.
Bad actors use AI powered tools to crest adapt EBITDAX weaponized zero day vulnerabilities and build botnets.
To help our customers stay ahead of these threats, we fight AI with AI.
<unk> 360 application protection automates defenses with AI and machine learning based algorithms.
Evolve as the FX change.
Alongside the growth in our cloud security business, the challenging macro environment continue to temper our appliance business.
On one hand, we still encounter hesitation to close large capex deals and on the other end the very early signs of stability are encouraging.
We see positive customer discussions and reduced and a renewed interest in on Prem ADC and security solutions.
On our own execution plan, we continue to focus on improving the performance in the Americas.
While we still have a lot of work to do we are confident that our customer base partnerships and sales and support infrastructure will enable us to resume growth in this region.
As we highlighted on our last call. We've also taken actions to optimize and align our expenses and reallocate our investment to support high growth areas such as cloud security.
These actions are already reflected in our operating expenses, which were reduced to $50 million during the third quarter of 2023.
Before I close let me share with you a few examples of our success in the third quarter.
We signed a sizable new logo deal with one of the largest banks in Europe.
And we're looking for a complete data center security solution, including hybrid cloud Ddos and application security.
We replaced an incumbent solution.
We also closed a multimillion dollar deal with a leading provider of energy and telecommunications services in Asia Pacific.
This new logo wanted to enhance its security posture and will replace the incumbent solution with our portfolio.
The third quarter was also a successful quarter with fiscal.
We signed many deals, including a European financial Institute.
In utility and service organization, a leading U S based medical center and many more.
In summary, we have success successfully grown our cloud security business and we will continue to execute our cloud strategy.
We are cautiously optimistic about the recovery of the appliance business.
Together with the large opportunities in the cloud security market will.
We believe we will return to total revenue growth next year.
In addition, we remain completely committed to improving our profitability.
Driving revenue and taking a disciplined approach to expense management.
With that I will now turn the call over to Guy.
Thank you Roy and good day everyone.
I am pleased to provide the analysis of our financial results and business performance for the third quarter of 2023.
As well as our outlook for the fourth quarter of 2023.
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.
And on the investors section of our website.
Revenue for the third quarter of 2023 was $61 6 million compared to $75 million in the same period of last year.
The third quarter revenue decline was due to changes in the pattern of large enterprise and service provider.
Which resulted in delaying the closing of large <unk> deals.
That's something that we have been experiencing in the last few quarters.
We believe that some of the delays are related to the macro environment and budget scrutiny.
However.
We do witness early signs of improvement in the business.
Which are reflected in better bookings in Q3 and quarter to date compared to Q2 2023.
Despite the challenges in closing large on Prem deals our cloud business accelerated its growth in the third quarter.
Now they are in the third quarter of 2023, 25% year over year to $62 $5 million.
The $50 million at the end of the third quarter of 2022.
Cloud they are accounted for 31% of total ALR.
Prior to 26% last year.
The growth of our cloud business is also reflected in our recurring revenue which accounted for 79%.
71% in Q3 2022.
Total <unk> increased by 5% to $204 $5 million. It was impacted by a terminated up to Ddos agreement with one of our customers that Troy mentioned earlier in his remarks.
Excluding the $5 million ALR churns from this extra ordinary cooperation in Q3 2022, our growth would have been 8% in Q3 2023 up from 7% in Q2 2023.
On a regional breakdown revenue in the Americas in the third quarter of 2023 was $25 million, representing a 24% decrease year over year.
On a trailing 12 months basis Americas revenue decreased by 10%.
The decrease is mainly a result of decline in the entre and large deals.
We're still working on improving our execution in this region.
Now revenue in the third quarter of 2023 and was $19 million compared to $22 million in Q3 2022.
An increase of 13% year over year and also on a trailing 12 month basis.
Finally, APAC revenue in the third quarter of 2023 was $17 million, which represent an increase of <unk>.
That's 12% year over year on a trailing 12 months basis.
Revenue increased by 1%.
Americas accounted for nearly 41% of total revenue in the third quarter EMEA accounted for 31% of total revenue and APAC accounted for the remaining 28% of total revenue in the third quarter of 2023.
I will now discuss profits and expenses.
Gross.
In Q3, 2023 was 81, 1% compared to 82, 9% in the same period in 2022.
The change in gross margin is mainly attributed to the decline in revenue.
We are encouraged by early signs of improvement in bookings, which we believe will drive revenue growth in 2024, and with that will drive gross margin to previous previous levels.
Above 82%.
As we highlighted a few quarters ago, there are prudent and minded to our expenses.
Especially in this challenging macro environment.
We reduced our operating expenses in the third quarter to approximately $50 million.
Below the lower end of our guidance.
We expect to improve our profitability going forward due to continued expenses.
The plane and full benefit of cost reduction, which was implemented in the third quarter of 2023.
While we reduced operating expenses, we believe that the expense structure is efficient to operate the business and enable our future growth.
Financial income continue to grow and reached $3 $8 million into third quarter as a result of higher interest rates in the market.
Net income in the third quarter was $2 $9 million as compared to $6 7 million in the same period of last year.
<unk> adjusted EBITDA for the third quarter was $1 6 million, which included $2 6 million negative impact after Hawks business.
Diluted earnings per share for Q3, 2023 was <unk> <unk> compared to <unk> 15 in Q3 2022.
Turning to cash flow statement and balance sheet.
The negative cash flow from operation is attributed mostly to the lower net income in Q3 2023 compared to Q3 2022 and a decrease in deferred revenue in Q3 2023.
During the third quarter, we repurchased shares in the amount of approximately $21 million.
As of September 32023, approximately $15 million remaining in our share repurchase plan.
We ended the third quarter with approximately $372 million in cash.
Cash equivalent.
Bank deposit and marketable securities.
I will conclude my remarks with guidance.
We expect total revenue for the fourth quarter of 2023 to be in the range of $63 million to $66 million.
We expect Q4 2023, non-GAAP operating expenses to be between 49, 5% to $51 million.
Also.
We expect Q4 2023, non-GAAP diluted net earnings per share to be between 11, and 13 cents in the fourth quarter of 2023.
I'll now turn the call over to the operator for questions.
<unk> please.
Operator.
My apologies I was somehow speaking on mute.
Pardon me.
A reminder, if you would like to ask a question Press Star then the number one on your telephone keypad.
And we will take our first question from George Notter with Jefferies. Your line is open.
Hi, guys. Thanks, very much I guess, maybe to start I just wanted to.
Just say to everybody good locked through this difficult situation in Israel, We're all thinking about you and we wish you the very best in please.
Please definitely stay safe and I hope all goes as well as it can.
I guess, maybe to start out with with questions.
Sure.
Cloud subscription business really seems to be improving here I guess I'm looking for another kind of layer of detail in terms of.
What's driving that improvement I know the attack environment seems to intensified over the last few weeks and months, but.
Maybe you can talk a little bit about where you think the strength is coming from and that cloud subscription business.
Okay. So first thanks George for your.
Opening comments regarding the.
The cloud.
We're seeing very strong growth from new logos acquisition.
And the core of the.
This is our ability to mitigate sophisticated attacks that become very very common lagged the web ddos scenario.
As mentioned.
So we're seeing both in Ddos and application security new vectors that game following the war of Russia, and Ukraine and other activities in the market.
That creates a new level of sophistication.
And burden on the defense systems, So, we see more and more customers that understand the hard way, sometimes or by looking at what happens to their.
Appeals in the industry that the current security measures they have are insufficient.
It's definitely creating.
We are on the enterprise agreements were seeing more openness towards our cloud security solutions. So those would be the three.
<unk>.
How about I know you guys have.
Partnerships with service providers can you talk about how those are progressing is that contributing to the growth.
Yeah, So what we're seeing there.
Along with comments that tolerant.
Solutions are insufficient, we're seeing carriers and msos speeds around the world understanding that in order to continue to serve their customers. The must increase the level of tumors capabilities automation. They have and what we were able to do is to sign some of those partnerships agreements around the <unk>.
Well do you have mentioned the <unk> in our press release from the New Zealand, one where basically they are leveraging our cloud security notes is approved.
To assist them in their MSP operation basically becoming the MSP.
Technology or behind the curtain of damage to speed the ones that delivered the service, we see that as a very good motion going forward because it allows us to gain significant market share in those markets. So if a carrier in a market is actually using you for ddos so for uptick there.
We'll first generally me great may be over time over the yield so, but it wouldnt be greater or existing customer base of the platforms. They have towards the MSP was starting to sell and promote additional services. We're planning to leverage that we think we are uniquely positioned to support that as our tours.
Our OEM, our OEM Kate the Bill White label capability, our operation is very well trained in supporting partners like Cisco Nokia and checkpoints. So to the same extent it can support those skus and we believe for US it's an ability to take a lot of share quickly in these markets.
Great. Thank you very much.
And we will take our next question from Christopher <unk> with Barclays. Your line is open.
Hi, Thanks for taking my questions can you mention.
The measures that has contributed or will further contribute to.
The cost management side.
<unk>.
And we're doing several things one well.
We're looked at we've looked at the sales and marketing organization as a whole and we look for places that we saw.
Our investment did not yield the highest dollar lie.
And obviously, we the consolidated already changed that level of investment.
Second we.
We took some measures in some of the third party or overlay investments that we had.
And maybe it's more I would say quota carrying.
Mmm.
[laughter].
And Mister Henderson. Your line is open please check your mute button.
Hello.
Hi, Alex.
Okay can you hear me right.
I don't know why wasn't picking up for when I was using my headset.
Let me start off by saying thanks.
Starting point Uhm.
Can you talk a little bit about what is yours.
What percentage of your employees were called.
Called up from reserves.
If that's a factor in the outlook going forward.
The.
Worst days.
More extended in time.
Just so that we can talk to to that risk.
S O as us today around 16 ploys are in the reserve.
We don't accept expect this number to increase that 5% of.
Head count and the company.
We we replaced in terms of functions all all of these people so we.
If you don't see any any impact on the fitness.
Perfect that it didn't expect there to be but I wanted to make sure I had the statistics.
This second question can you talk a little bit about the the exchange rate and how you you know you're hedging programs or.
You know what what's going on there for the simple reason that the shekel is obviously under a lot of pressure over the last couple of quarters.
Yeah, so for the time in and as we just discussed.
<unk> previously 2023, the hedged alrighty, so the impact of the above four F X.
<unk>.
B C and D. C are that being said we had some of 2024.
Still have a room to hedge.
And that will elude to the conclusion that obviously, we will have a better hedging strategy next year, which means lower off X.
Okay.
Mm mm.
Yeah.
It does seem like the.
Israel.
Have resulted in some pulled in and expectations and spending intentions. So is that.
Is the macro environment showing any change.
Change in conditions from September into October or is that relatively stable or is it too early to tell could you could you talk to that a little bit.
Oh, we we mentioned in the common theory that we are seeing some early signs.
And we are watching linearity. We also mentioned that in this scrape that let's say the first month of the quote a desk or was it better than the photo before.
It means that.
Macro wise, we think we're in a better position.
Last two quarters.
Yeah.
Just to add to that also from.
No the activity and the threat landscape actually we're seeing.
Sort of attacks across in Israel of course, but more importantly for the global.
Across the world, whether it's U S, Canada, all of Western Europe, and so on true actually from a demand perspective.
The criticality of our solutions.
Give a political event is actually creating more sensibly urgency with me so all in all <unk>.
Bush's flea optimistic that is actually not going to be a fool and down from D. C.
The war and might be actually a a beat the Phillies.
<unk> cause.
Alright, and just wanted to say thanks for giving me that tour of your.
Cloudware them when I visited you guys in Israel in September it was a pretty impressive thanks.
They're always welcome Alex Thanks for your comments.
And there are no further questions at this time so.
So I will now turn the call back to Mister right is this account for closing remark.
Okay. Thank you everyone for attending today and have a great day.
Ladies and gentlemen, this concludes today's conference call and we thank you for your participation you may not disconnect.
Please wait the conference will begin shortly.
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