Radware Q3 2023 Earnings Call Transcript

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November 1, 2023

There are 7 speakers on the call.

Operator

Welcome to the Radware Conference Call discussing 3rd Quarter 2023 Results, and thank you all for holding. As a reminder, this conference is being recorded November 1, 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. Thank you. And I would now like to turn this call over to Iska Erez, Director of Investor Relations at Radware. Please go ahead.

Speaker 1

Thanks, Adi. Good morning, everyone, and welcome to Radware's Q3 2023 earnings conference call. Joining me today are Roy Visapel, President and Chief Executive Officer and Gaia Vidhan, Chief Financial Officer. A couple of today's press release and financial statements as well as the investor kit for the Q3 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 for the future financial performance of the company.

Speaker 1

These forward looking statements are subject to various risks and uncertainties, And actual results could differ materially from Radware's current forecast and estimates. Actors that could cause or contribute if such differences include, But are not limited to impact from changing or severe global economic conditions, the COVID-nineteen pandemic, General business condition and our ability to address changes in our industry, changes in demand for product, The timing and the amount of orders and other risks differ from time to time in Radware's filings. We refer you to the The company files and furnishes from time to time with the SEC, specifically the company's last annual report on Form 20A, as filed on March 30, 2023. 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 Bissapin.

Speaker 2

Thank you, Iskha, and thank you all for joining us today. Before I address our Q3 financial results, I would like to update you on the status of our business operations. As you know, on October 7, the terrorist group Hamas attack the southern border of Israel resulting in many casualties and kidnappings. Our heart goes To all the people that lost their loved ones, the people who were injured, the hostages and the people who had gone through this attack. Israel is now fighting to free those who are being held hostage and to remove the threat of Hamas.

Speaker 2

While this is taking place, I want to assure you that Cradog 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, All running as planned. As needed, we have reallocated internal resources to cover for a number of employees who have been called For the Israel Defense Force, you can be assured that rather as all 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 For their support and the kind words during the past 3 weeks. We truly appreciate your standing with Israel.

Speaker 2

Additionally, Bifor has a cyber dimension and Radul is standing at the forefront. We are blocking attacks Some of Israel's critical infrastructure as well as prominent government offices, banking institutes and media organizations. Furthermore, we are using the intelligence we gather to protect our global customers as the same hackers who are attacking Israel We are also targeting Western countries. With that, I'd like to update you on Q3 financial results. We ended the Q3 with revenues of $62,000,000 and non GAAP earnings per share of $0.07 Last quarter was another strong quarter for our cloud security business.

Speaker 2

Our cloud ARR increased 25% year over year $62,500,000 accelerating growth from 21% in the Q1 and 23% in the Q2 of 2023. In addition, we continue to record double digit growth across bookings, new logos And total customers, including midsized enterprises. Our cloud growth potential is huge and we are confident in our ability to achieve A sustained CAGR of 25% ARR 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 recurring revenue, Which accounted for 79% of total revenue in the 3rd quarter as compared to 71% during the same period last year.

Speaker 2

We are making steady progress in our transition from an appliance company to a cloud security as a service company. The strength of our cloud security offering is becoming more apparent in the market and to our peers. 1 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 $5,000,000 reduction in total ARR, Which totaled $204,000,000 in the 3rd quarter, 5% growth year over year compared to $195,000,000 in the Q3 of 2022. When excluding this ARR churn from previous quarters due to the unique nature Of this competitive relationship, ARR increased 8% year over year, a slight uptick from 7% growth in the Q2 of 2023.

Speaker 2

In the last few quarters, we've seen a big shift in the threat landscape marked by These high volume encrypted attacks bypass traditional web application firewall and network based PDOs, Rendering them ineffective. Enterprises such as Microsoft, UPS, Wells Fargo And many others were all negatively affected by these attacks. Our new Cloudweb DDoS Protection service, Which is specifically built to combat these attacks has become a strong market differentiator for us. Using our new AI based algorithms, our solutions detect and surgically block the attacks in real time without disrupting legitimate traffic. Artificial intelligence is also an emerging area of opportunity for Radler.

Speaker 2

Bad actors use AI powered tools to craft Adaptive attacks, weaponize 0 day vulnerabilities and build botnets. To help our customers stay ahead of these threats, We fight AI with AI. RADO 360 application protection automates defenses with AI and machine learning based algorithms But evolve as the attacks change. Alongside the growth in our cloud security business, The challenging macro environment continued to tamper our appliance business. On one hand, we still encounter hesitation to close large CapEx deals, And on the other hand, the very early signs of stability are encouraging.

Speaker 2

We see positive customer discussions and 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 we allocate our investment to support high growth areas such as cloud security. These actions are already reflected in our operating expenses, Which were reduced to $50,000,000 in the Q3 of 2023. Before I close, let me share with you a few examples of our We signed a sizable new logo deal with 1 of the largest banks in Europe.

Speaker 2

They were 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 telecommunication services In Asia Pacific. This new logo wanted to enhance its security posture and we replaced the incumbent solution with our portfolio. The Q3 was also a successful quarter with Cisco.

Speaker 2

We signed many deals, including a European Financial Institute, a European Utility and Service Organization, a leading U. S.-based medical center and many more. In summary, we have successfully grown our cloud security business and 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, We believe we will return to total revenue growth next year.

Speaker 2

In addition, we remain committed to improving our profitability By driving revenue and taking a disciplined approach to expense management. With that, I will now turn the call over to Guy.

Speaker 3

Thank you, Roy, and good day, everyone. I'm pleased to provide the analysis of our financial results and business performance for the Q3 of 2023 as well as our outlook for the Q4 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 on GAAP basis is available in the earnings press release issued earlier today And on the Investors section of our website. Revenue for the Q3 2023 $61,600,000 compared to $70,500,000 in the same period of last year.

Speaker 3

The Q1 revenue decline was due to changes in the pattern of large enterprise and service provider, Which resulted in delaying the closing of large on prem deals, a pattern 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 booking 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 3rd quarter. Cloud ARR in the Q3 of 2023 grew 25% year over year to $62,500,000 Compared to $50,000,000 at the end of the Q3 of 2022.

Speaker 3

Cloud ARR accounted for 31 percent of total ARR compared to 26% last year. The growth of our cloud business is also reflected in our recurring revenue, which accounted for 79% compared to 71% in Q3 2022. Total ARR increased by 5% to $204,500,000 and was impacted by a terminated Of the DDoS agreement with one of our customers that Troy mentioned earlier in his remarks, excluding the $5,000,000 ARR churn from This extraordinary cooperation in Q3 2022, ARR growth would have been 8% in Q3 2023, Up from 7% in Q2 2023. Our original breakdown, Revenue in the Americas in the Q3 of 2023 was $25,000,000 representing a 24% decrease year over year. On a trailing 12 month basis, Americas revenue decreased by 10%.

Speaker 3

The decrease is mainly a result of decline in on prem large deals. We're still working on improving our execution in this region. EMEA revenue in the Q3 2023 was $19,000,000 compared to $22,000,000 in Q3 2022, a decrease of 13% year over year And also on a trailing 12 month basis. Finally, APAC revenue in the Q1 of 2023 $70,000,000 which represents an increase of 12% year over year. On a trailing 12 months basis, APAC revenue increased by 1%.

Speaker 3

Americas accounted for nearly 41% of total revenue in the 3rd quarter. EMEA accounted for 31% of total revenue and APAC accounted for the remaining 28% of total revenue in the Q3 of 2020 I'll now discuss profits and expenses. Gross margin 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 booking, Which we believe will drive revenue growth in 2024 and with that will drive gross margin to previous levels Of about 82%.

Speaker 3

As we highlighted a few quarters ago, we're prudent and minded to our expenses, Especially in this challenging macro environment, we reduced our operating expenses in the Q3 to approximately $50,000,000 Below the lower end of our guidance, we expect to improve our profitability going forward due to continued expense Discipline and full benefit of cost reduction, which was implemented in the Q3 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 continued to grow and reached $3,800,000 in the 3rd quarter As a result of higher interest rates in the market, net income in the 3rd quarter was $2,900,000 as compared to 6,700,000 In the same period of last year, Broadridge adjusted EBITDA for the Q3 was $1,600,000 Which included $2,600,000 negative impact of the Hawx business. Diluted earnings per share for Q3 2023 It was $0.07 compared to $0.15 in Q3 2022. Turning to cash flow statement and balance sheet.

Speaker 3

Cash flow from operations in Q3 2023 was negative $9,800,000 compared to positive cash flow from operation Of $1,500,000 in the same period of last year. 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 the 3rd revenue in Q3 2023. During the Q3, we repurchased shares in the amount of approximately 21,000,000. As of September 30, 2023, approximately $15,000,000 remained in our share repurchase plan. We ended the Q3 with approximately $372,000,000 in cash, cash equivalents, Thanks, Deposits and Marketable Securities.

Speaker 3

I'll conclude my remarks with guidance. We expect total revenue for the Q4 of 2023 to be in the range of 63 The $66,000,000 we expect Q4 2023 non GAAP operating expenses to be between $49,500,000 to $51,000,000 Also, we expect Q4 2023 non GAAP diluted net earnings per I'll now turn the call over to the operator for questions. Operator, please?

Operator

My apologies, I was somehow speaking on mute. And we will take our first question from George Notter with Jefferies. Your line is open.

Speaker 4

Hi, guys. Thanks very much. I guess maybe to start, I just wanted to just say to everybody good luck Through this difficult situation in Israel, we're all thinking about you and we wish you the very best and please definitely stay safe and I hope all It goes as well as it can. I guess maybe to start out with questions. Your Cloud subscription business really seems to be improving here.

Speaker 4

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 intensify over the last few weeks months, but maybe you can talk a little bit about where you think the strength is coming

Speaker 2

Okay. So first, thanks, George, for your opening comments. Regarding the cloud, we're seeing very strong growth from New Logos acquisition. And the core of this is our ability to mitigate sophisticated attacks that become Very, very common, like the web DDoS scenario that I've mentioned. So we're seeing both in DDoS And in application security, new vectors that came following the war of Russia and Ukraine and other Activities in the market, and that creates a new level of sophistication And Burton on the defense systems.

Speaker 2

So we see more and more customers that understand the hard way sometimes or By looking at what happens to their peers in their industry, the current security measures they have are insufficient. So that's definitely creating a strong advantage. And second, the more references we have, especially in the high end, We're seeing to get more and more customers. And the last point I would mention, Cisco and to some extent Check Point We started to contribute more into our cloud business as well, especially as Cisco now is on the EA, we are on the enterprise agreement. We're seeing more openness towards our cloud security solutions.

Speaker 2

So those would be the 3 factors there.

Speaker 4

How about I know you guys have put out some new scrubbing services. I know there was a deal in New Zealand. I think there's a deal in India, Partnerships with service providers, can you talk about how those are progressing? Is that contributing to the growth?

Speaker 2

Yes. So what we're seeing there is along my comments that current solutions are We're seeing carriers and MSSPs around the world understanding that in order to continue to serve their customers, they must Increase the level of tools, capabilities, automation they have. And what we were able to do is To sign some of those partnerships agreements around the world, you've mentioned the India one and our press release on the New Zealand one, where basically they are leveraging our Cloud security nodes to assist them in their MSSP operation. We're basically becoming their MSSP Technology or behind the curtain of the MSSP, the ones that deliver the service. We see that as a very good motion going forward Because it allows us to gain significant market share in those markets.

Speaker 2

So if a carrier in a market is actually using you for Dido. So for UpSec, they will first generally migrate maybe over time over a year or so, They would migrate their existing customer base off the platforms they have towards the MSSP while starting to sell And promote additional services. We're planning to leverage that. We think we're uniquely positioned to support that as our tools are OEM Our OEM capable, white label capable, our operation is very well trained in supporting partners like Cisco, Nokia and Checkpoint. So to the same extent, it can support those carriers, and we believe for us, it's an ability to take a lot of share quickly in these markets.

Speaker 4

Great. Thank you very much.

Operator

And we will take our next question from Chris Reimer with Barclays. Your line is open.

Speaker 5

Hi. Thanks for taking my questions. Can you mention some of the measures that have contributed or will

Speaker 2

We're doing several things. 1, we're looking we've looked at the sales and marketing organization as a whole, and we looked For places that we thought our investment did not yield the right ROI, and obviously, we either consolidated Or changed that level of investment. 2nd, we took some measures In some of the 3rd party or overlay investments that we had and made it more, I would say, quarter carrying Direct selling relationship. 3rd, we've taken some of those costs that we've taken out of the model And actually allocated them towards our cloud security business to improve cloud success managers Numbers and coverage to improve the operation, to invest more towards R and D. So all in all, we've done a measured steps on the organization to align the level of business, Starting to see, obviously, as Guy mentioned, in the Q3 the results in the P and L, and we're going to continue to balance The revenue with expense and as you see from our guidance, we do expect profitability because of these steps to improve.

Speaker 5

Great. Thank you. That's it for me.

Operator

Question from Alex Henderson with Needham and Company. Your line is open. And Mr. Henderson, your line

Speaker 1

is open. Please check your mute button.

Speaker 2

Hello? Hi, Alex. Can you

Speaker 6

hear me? Great. I don't know why I wasn't picking up when I was using my headset. Let me start off by saying thanks for the print, but I also hope everybody is safe In Israel and that all your families are safe. But with that as a starting point, Can you talk a little bit about whether there's what percentage of your employees were called up from reserves and If that's a factor in the outlook going forward, if the war stays More extended in time, just so that we can talk to that risk.

Speaker 3

Yes. So as of today, around 60 employees are in reserve. We don't Expect this number to increase. That's 5% of total headcount in the company. We replaced In terms of functions, all these people.

Speaker 3

So we don't see any impact on the business.

Speaker 6

Perfect. I didn't expect there to be, but I wanted to make sure I had these statistics. This Second question, can you talk a little bit about the exchange rate and how your hedging programs or 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?

Speaker 3

Yes. So for the time being and as we earlier discussed previously, 2023 is hedged already. So the impact of the above 4% FX will not We've seen this here. That being said, we hedged some of 2024. We still have room to hedge And that will allude to the conclusion that obviously we will have a better hedging strategy next year, which means lower OpEx.

Speaker 6

It does seem like The events in Israel have resulted in some pull in Expectations and spending intentions. So is that is the macro environment Showing any change in conditions from September into October or is that relatively stable or is it too early to tell? Can you talk to that a little bit?

Speaker 3

We mentioned in the first commentary that we are seeing some early Thanks and we are watching linearity. We also mentioned that in the script that let's say The 1st month of the quarter, this quarter was better than the quarter before. It means that macro wise, we think we're in a better position versus the last two quarters.

Speaker 2

And just to add to that, also from the activity in the threat landscape, Actually, we're seeing a lot 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. So actually from a demand perspective And the criticality of our solutions, this geopolitical event is actually creating more sense of urgency, we think. So all in all, we are cautiously optimistic that there's actually not going to be a pull down from this We were and might be actually a bit acceleration of cycles.

Speaker 6

Great. And just want to say thanks for giving me that tour of your Cloud War Room when I visited you guys

Operator

And there are no further questions at this time. So I will now turn the call back to Mr. Roy Islipel for closing remarks.

Speaker 2

Okay. Thank you everyone for attending today and have a great day.

Operator

Ladies and gentlemen, this concludes today's conference call and we thank you for your participation. You may now disconnect.

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Key Takeaways

  • Business operations in Israel remain uninterrupted despite recent regional conflicts, with global technical support and cloud services continuing without interruption under existing continuity plans.
  • Cloud ARR rose 25% year-over-year to $62.5 million in Q3, up from 21% growth in Q1 and 23% in Q2, underpinning confidence in a sustained 25% CAGR for cloud ARR.
  • Subscription and recurring revenue now account for 45% and 79% of total sales respectively, reflecting steady progress in the shift from appliances to cloud-based security services.
  • On-premises appliance sales remain pressured, with Americas revenue down 24% year-over-year and an unexpected $5 million ARR churn after a key DDoS partnership was terminated.
  • Q4 2023 guidance forecasts $63–$66 million in revenue and $49.5–$51 million in non-GAAP operating expenses, with management cautiously optimistic about a return to growth in 2024.
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Earnings Conference Call
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