Radware Ltd. (NASDAQ:RDWR) Q1 2024 Earnings Call Transcript

Radware Ltd. (NASDAQ:RDWR) Q1 2024 Earnings Call Transcript May 8, 2024

Radware Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Radware Conference Call discussing First Quarter 2024 Results and thank you all for holding. At this time, all lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded May 8, 2024. I would now like to turn the call over to Yisca Erez, Director, Investor Relations at Radware. Please go ahead.

Yisca Erez: Thank you, operator. Good morning everyone, and welcome to Radware’s first quarter 2024 earnings conference call. Joining me today are Roy Zisapel, President and Chief Executive Officer, and Guy Avidan, Chief Financial Officer. A copy of today’s press release and the financial statements, as well as the investor kit for the first 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. The forward-looking statements are subject to various risks and uncertainties, and actual results could differ materially from Radware’s current forecast and estimate.

Factors that could cause or contribute to such differences include, but are not limited to, impact 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, the timing in the amount of orders and other risks detailed from time to time in Radware’s filing. 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 March 25, 2024. We undertake no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date of such statement is made. I will now turn the call to Roy Zisapel.

Roy Zisapel: Thank you Yisca, and thank you all for joining us today. We ended the first quarter of 2024 with revenues of $65 million and non-GAAP earnings per share of $0.16, both above the high end of our guidance. We diligently managed expenses and improved our profitability. Similar to previous quarter, we witnessed a favorable business environment marked by an uptick in large CapEx deals, more customer engagement and a healthier pipeline. In the first quarter, total adjusted ARR increased 8% year-over-year, driven by growth in our cloud and subscription business. Subscription revenues now account for 46% of total revenue compared to 41% in the first quarter of last year, demonstrating our ongoing shift to SaaS model. Our cloud security business sustained robust growth with cloud ARR growing again 22% year-over-year.

This performance is also underscored by a record number of new bookings and new logos. The momentum behind our cloud security business is driven by four key growth drivers that we believe are sustainable. First, our product offering fuel strength consistently draws security conscious customers. Our cloud security offering leads with a large battery of AI powered security algorithms designed to detect and block attacks without disrupting legitimate traffic flows. Customers highly value these unique capabilities, driving numerous new logos and expansion deals. Second, the ongoing expansion of our cloud security offering creates additional cross and upsell opportunities. During the first quarter, we announced the expansion of our cloud application and network security services to include a new hardware load balancer as a service and enhanced cloud network analytics service.

These services assist organizations in optimizing application performance, ensuring availability and maximizing network monitoring and visibility during peacetime. They complement the value we provide, further strengthening our proposition to clients. Third, the steady expansion of our geographical footprint creates new customer acquisition opportunities. During the first quarter, we expanded our global cloud service network and launched a new DDoS scrubbing center in Paris. We plan to introduce additional locations later in the year. Fourth, a pivotal factor is the surge in application and network attacks, in particular, layer 7 web DDoS attacks, fueling customer demand for enhanced protection this new wave of web DDoS attacks has been motivated by major geopolitical conflicts and activists activities.

A trendset during Russia invasion of Ukraine had led to an increased frequency and sophistication of web DDoS attacks. These attacks emerged last year and intensified in the previous quarter, with expectations for further escalation in frequency, complexity and sophistication throughout 2024. The growing demand for advanced real time protection is evident in the success of our DefensePro X solution, which provides protection against web DDoS and advanced DNS attacks. DefensePro X has performed very well and been highly competitive. The AI powered offering is unmatched in its ability to automatically detect and surgically block web DDoS attacks. This result is improved security and faster time to resolution, crucial for maintaining customer business continuity.

The strength of this value proposition is evident in some of our first quarter wins. For example, we signed two major seven-digit DefensePro X deals, one with a tier one carrier in North America that upgraded their DDoS protection. The other win was with a major European financial institution that experienced a large layer seven attack. The latter also replaced their incumbent cloud DDoS provider with our hybrid cloud DDoS solution for a complete protection. Our partnership with Cisco and Check Point were another contributor to our performance in the first quarter. We kicked off 2024 with record Cisco booking following a record year in 2023. While Check Point also demonstrated a strong start for the year. To protect our customers, we constantly innovating our offering.

With AI at the fingertips of attackers, threats are becoming not only increasingly complex and adaptive, but also with reduced time to attack. In response, we’re taking a fight AI with AI approach to security. A good example for our fight AI with AI strategy is the enhancements we introduced to our bot manager. The newest addition of our bot manager is designed to automatically mitigate a new generation of aggressive, AI driven, inhuman like bots without blocking legitimate users. For our customers, this means better end user experience and a reduction in costly business impacts like customer churn and lost revenues. Another example is the AI powered Wolfray DNS DDoS protection solution. Using our patented algorithms, it automatically distinguishes between legitimate and attack traffic and instantly adapts DDoS defenses based on the specific attacker.

According to our recent threat intelligence report, DNS flood attacks increased nearly 400% between 2022 and 2023, and these new algorithms will significantly shorten time to resolution when countering even the most sophisticated DNS attacks. Our offering continued to receive recognition by industry analysts in quadrant 2024 Spark Metrics report for DDoS mitigation, Radware was named a leader for the fourth consecutive year. Radware was also named as an other leader as well as product innovation and market leader in KuppingerCole Leadership Compass report for web application firewalls. In GigaOm 2024 report for application and API security, Radware earned recognition as a fast mover and leader. In addition, we were the only vendor to earn GigaOm’s top scores for AI enhanced vulnerability detection and key bot management features.

In one quarter, we were recognized as a leader in DDoS, in web application firewall, and in API security. This is another evidence for our best of suite approach. We provide customers with an integrated suite to protect application and data center attacks. While our capabilities in each of the core pillars of DDoS, WAF, API, and bot security lead the market when evaluated as a standalone capability, our customers receive best of bid security alongside a fully integrated suite, hence best of suite. In summary, we began 2024 with a solid performance. We delivered sustained growth in cloud ARR, improved profitability, expanded market presence, and leveraged momentum with our OEMs. These results were supported by improvements in the business environment, rebounding customer spending, and heightened cyberattack.

We believe Radware has the right offering to meet the market demand for best in class security and faster response and recovery times, and we intend to capitalize on that for ongoing growth and increased profitability. With that, I will turn the call over to Guy.

Guy Avidan: Thank you Roy, and good day everyone. I’m pleased to provide the analysis of our financial results and business performance for the first quarter of 2024, as well as our outlook for the second quarter of 2024. 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. Revenue for the first quarter 2024 was $65.1 million, compared to $69 million in the same period of last year. Revenue was driven by cloud and subscription growth offset by product decline. As Roy highlighted, we are encouraged by the recovery sign we see in customer demand and engagement, even though customer spending is not completely back on track.

The cloud security business continued to demonstrate strength with 22% year-over-year growth in cloud ARR similar to last year, and reached $67 million in the first quarter of 2024. Cloud ARR now accounts for 32% of total ARR compared to 27% in Q1 2023. On original breakdown, revenue in the Americas in the first quarter of 2024 was $27.1 million, similar to the same period last year, and accounted for 42% of total revenue. On a twelve-month basis, America revenue decreased 15% year-over-year. EMEA revenue in the first quarter 2024 decreased 24% year-over-year to $22.7 million and accounted for 35% of total revenue. The decrease is mainly attributed to a large deal recognized in Q1 2023. On a twelve-month basis, EMEA revenue decreased 15% year-over-year.

APAC revenue in the first quarter of 2024 was $15.3 million, which represents an increase of 25% year-over-year and accounted for 23% of total revenue. On a twelve-month basis, APAC revenue increased 5% year-over-year. I’ll now discuss profits and expenses. Gross margin in Q1 2024 was 82% compared to 82.3% in the same period in 2023. Operating expenses decreased 6% year-over-year and totaled $49 million, which is at the lower end of our guidance. Operating income reached $4.3 million compared to $4.4 million in the same period of last year, and with this level of OpEx, we believe that the company is positioned to better profitability in the coming quarters. As we highlighted a couple of quarters ago, we are committed to drive efficiency and keep our cost structure aligned with the level of company’s operations.

We are confident in our ability to continue to improve our profitability and adjust expenses as necessary. Radware’s adjusted EBITDA for the first quarter was $6.2 million, or $8.9 million excluding the Hawks business, compared to $6.5 million, or $9.2 million, excluding the Hawks business in the same period of last year. Financial income was $3.8 million in the first quarter. This level of financial income is expected to continue throughout 2024. The tax rate for the first quarter of 2024 was 15.3% compared to 14.8% in the same period of last year. We expect the tax rate to remain approximately the same next quarter. Net income in the first quarter was $6.8 million as compared to $6.1 million in the same period last year. Diluted earnings per share for Q1 2024 was $0.16 compared to $0.14 in Q1 2023.

Turning to the cash flow statement and the balance sheet, cash flow from operation in Q1 2024 was $21.1 million, compared to a negative cash flow from operation of $1.2 million in the same period of last year. The improvement in cash flow from operation is derived from strong billing performance in the first quarter of 2024 and in Q4 2023 and higher net income. During the first quarter we repurchased shares in the amount of approximately $840,000 as of March 31, 2024 approximately $66 million remain in our share repurchase plan. We ended the first quarter with approximately $383 million in cash, cash equivalent bank deposit and marketable securities. I’ll conclude my remarks with guidance. We expect total revenue for the second quarter of 2024 to be in the range of $65 to $67 million.

We expect Q2 2024 non-GAAP operating expenses to be between $49 million to $50 million. We expect Q2 2024 non-GAAP diluted net earnings per share to be between $0.15 and $0.17, representing an increase of approximately 60% year-over-year at the mid end at the midpoint guidance. I’ll now return the call over to the operator for questions. Operator, please.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Alex Henderson of Needham. Your line is open.

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Q&A Session

Alex Henderson: Hey guys. So I was hoping you could talk a little bit about the pipeline and kind of what the book to bill looked like in the quarter. Were you seeing, you made comments of encouraging trajectory. Is that evident in the pipeline, in the booking the book to bill numbers in the quarter?

Roy Zisapel: Hi Alex. So definitely, as Guy mentioned and I mentioned in our remarks, we do see better customer activity, better market conditions. We want to be conservative. We say it’s not yet back to previous levels, but there’s definitely an improvement, improvement in the tempo of the customers. We see deals that were parked in the pipe for a long time, started to starting to move. So overall we are encouraged by the booking by the pipeline and hence we are more optimistic for 2024.

Alex Henderson: If you could go into some of the deal mechanics, did the close rates improve? Did the duration of contracts improve? Deal size improve? Deal process time? It sounds like that has improved. Just click on key mechanics.

Roy Zisapel: Yeah, so I think in 2023 we saw the large customers stalling, meaning the pipeline was there, but the deals were not advancing, not in the tempo we used to see starting in Q4 we already discussed that in our last conference call we started the first signs of those opening up. It continued in Q1, and we have also expectations for the coming quarter. With that, we’re seeing the attack, forcing many customers to take a faster and broader decision on their application security strategy. Here we are very well positioned with our cloud application security, with the unique capabilities in web DDoS, in the broad application protection, and in this market we are seeing very fast cycles. So it’s a combination of the large deals, I would say more architecture, CapEx deployment starting to move with continued strong growth in the cloud application security business.

Alex Henderson: Okay, is closure rates on deals improved as well? So it sounds like deal size has improved and deal process times improved, what about closure rates and duration of the deal durations?

Roy Zisapel: I think duration is shortened. I don’t think closure rates have changed. As I said last year it was mainly this stall, so you did not lose, nor win the deal, so it did not impact the rates. But now we are seeing faster deal cycles.

Alex Henderson: Could you talk a little bit about your traditional business and to what extent you can bring down the inventory, what’s going on in the traditional ADC market and what’s going on in terms of your ability to bring the inventory down as a result of supply chain improvements?

Roy Zisapel: Yeah. So that’s how we got.

Guy Avidan: I’ll answer the inventory question. So, we came to a peak level at the end of 2023, reduced it a little bit in the first quarter, 2024, and we expect to continue to reduce inventory level. We talked about it last quarter. Pushing DefensePro X and new version for ADC put us in the place of transition in terms of end of support, end of sale in the future. So we got extra inventory just to be on the safe side but levels will go down throughout 2024.

Alex Henderson: Will it go down towards the $10 million level by the end of the year? Do you think so? Net improvement of $5.5 million.

Guy Avidan: Closer to 12.

Alex Henderson: 12. Okay, that’s, that’s great. Thanks. And so did you say you end of life some portion of your product line?

Roy Zisapel: Yeah. It’s a common thing that when we refresh the platforms and we bring new, new generation of platforms, then the older line is.

Alex Henderson: The older line. It’s it’s — it’s a new new platform replacing the old one. Yeah, I just wanted to make sure I understood what you were saying. Any comment on the Cisco or other partners?

Roy Zisapel: Yeah, so as I said in my remarks, we had a record booking with revenues with Cisco in Q1. It’s following a record year in 2023. Also, checkpoint is in a very strong level of performance currently. So, all in all, we continue to enhance those relationships. We’re putting more and more offerings on the Cisco enterprise agreements. We broadened also the checkpoint agreement to the new line of DefensePro X. We were seeing good uptake by our OEM partners of the new offerings and overall better cooperation in the market. So, both those relationships at this level are at a high level of execution.

Alex Henderson: Great. I’ll see the floor and get back in queue. Thanks.

Roy Zisapel: Thank you.

Operator: Your next question comes from the line of Chris Reimer of Barclays. Your line is open.

Chris Reimer: Yeah, hi. Thanks for taking my questions and congratulations on the strong results. I was wondering if you could talk a little more about how you mentioned a lot about the fighting AI with AI. I was wondering if you could just give a little more color about how AI is changing the landscape? And how products have to, in turn, repel that?

Roy Zisapel: Okay, thanks, Chris. So, I think there are several aspects to that. The first aspect is that AI allows hackers to automate and scale their attack way more quickly. The second aspect is that it allows them to morph the attack, to change the attack during the attack time more quickly, meaning we are going to see, we’re seeing attacks that starts in one way, and then if we’re doing better mitigation in 5-10 minutes, the attack is changing. That requires also the difference to adjust and change. This means that it’s very hard with people and static rules and signatures, which is how the industry is working for the most part, to combat these attacks, simply because they are changing quickly. So, you need also, on the different side, to be much more algorithmic based, much more adaptive, automated, in order to block the attacks.

The third aspect is what we call the time to attack. In the past, when there was a vulnerability, you need experts to take that vulnerability that was discovered and write code, write programs that would take advantage of that vulnerability and created the attack. With Gen AI, that time and that expertise is becoming a non-issue. The time is shortened considerably, and you don’t need to be an expert to do that. This is what we call time to attack. The time to attack is now going from months or days to minutes, which means, again, on the different side, you need to be way more adaptive, way ahead of the game in order to do that. We continue to enhance our algorithms, and I’ve given several examples of what we’ve done in Q1. There’s another set of algorithms going in Q2.

This has been the core of our solutions, in DDoS WAAP API, over the years. This is why we are getting all those leadership statements by analysts. But it’s becoming now our live or die junction for security solutions, and we believe we are very well positioned here. I mentioned the web DDoS attacks. Those are an excellent example to how the attacks are morphing very quickly to the extent of every 5-10 minutes. It’s an excellent example to the scale that hackers are able to attack today, mission critical applications. And we are very strong in our ability, with a completely automated algorithm set, to mitigate those attacks within seconds with no human intervention and with no impact to our customer, mission critical applications. If you look on many of our cloud app security wins in Q4, in Q1, especially as we move from competitors, whether it was an on prem deployment of an ADC and OAuth, or a different cloud security, offering those moves from them to us, this was a very, very strong contributor to that.

So going forward, we believe those trends will actually accelerate. And as a result, on the different side, we are ramping up our investments in AI, in bringing those algorithms to be part of our cloud application, security and data solution. And we believe that will translate to meaningful benefits for our customers.

Chris Reimer: Got it. Great, thanks. That’s really great color. Just also, if you could touch a little bit about on the different characteristics you’re seeing in some of the geographies, the Americas and EMEA, I know you also gave a number, about a twelve month growth number. If you could just talk about what you’re seeing for customers in the different geographies.

Roy Zisapel: Yeah. So, you know, 2023 was a difficult year for us in the Americas and to some extent in EMEA, but we are, we’ve seen that now coming back. So, you know, at this point, our view for both America’s and EMEA for 2024 is for growth. So, we’re feeling much better on the business. There’s a lot more potential. We’re clearly in the very beginning, I would say, of the cycle, but you are definitely seeing improvement in the business in those two markets.

Chris Reimer: Great, thanks. That’s it for me.

Roy Zisapel: Thank you.

Operator: Your next question comes from the line of George Nader of Jefferies. Your line is open.

George Nader: Hi there. Thanks very much. I was just interested in your additional investments in scrubbing centers. I think you mentioned a Paris facility going in. I think it’s been a while since you guys have added scrubbing centers. I’m just curious about what you’re seeing in the marketplace that’s pushing you to make the additional investment. And what do you see going forward in terms of new scrubbing centers that you turn up? Thanks.

Roy Zisapel: Thanks, George. So we do see geographical expansion as customers, especially in banking, government wants local facilities for processing traffic. It’s not so much from a global capacity ability to mitigate attacks, it’s more from the localization compliance in these areas. We do have a very broad network today, 40 different areas that we operate in from, but at the same time we do see these opportunities come up. We announced in recent quarters, like opening in New Zealand and in Taiwan and so on. We do see, especially with our MSSP, with our growing MSSP operation, they need to open additional data centers and we do plan throughout 2024 to open additional locations around the world. It’s definitely one of the drivers for the growth we’re seeing in our cloud security, and we want to leverage that.

George Nader: I’m sorry. And the MSSP is your traditional security point of presence, correct?

Roy Zisapel: The MSSP is the Managed Security Service Providers around the world that want to enhance their offering into DDoS and application security. Now in the past they were buying equipment from us or from our competitors and trying to stand up such a service. We’re seeing more and more around the world and, you know, I refer the, you know, to our announcement about Spark in New Zealand for example, or around Vietnam, in Vietnam, Airtel in the past and so on. And they want to utilize today our cloud solutions, because it brings them a global network, a state-of-the-art solution with portal analytics, AI algorithms in the backend. And it really allows them to capture more market share. As we do that with them, there are certain markets, for example, I gave the example of Vietnam or of New Zealand, that we are opening additional centers to serve those local partners.