Radware Q2 2023 Earnings Call Transcript

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August 2, 2023

Key Takeaways

  • Q2 revenue declined to $65.6 M (from $75.1 M YoY), driven by delays in large on-prem appliance deals among enterprises and carriers.
  • Cloud security ARR grew 23% YoY to $59 M, with cloud bookings, new logos and customer counts all up double-digits, boosting recurring revenue to 79% of total.
  • Launched an AI-driven Cloud Web DDoS Protection Service and enhanced Bot Manager to combat sophisticated Layer 7 attacks, strengthening its SaaS security lineup.
  • Cost-optimization steps—including reduced sales & marketing spend and headcount cuts—aim to lower non-GAAP OpEx to approximately $50 M by year-end.
  • Q3 guidance calls for $61 M–$64 M revenue and non-GAAP EPS of $0.06–$0.10, reflecting macro headwinds while maintaining a path to profitability.
AI Generated. May Contain Errors.
Earnings Conference Call
Radware Q2 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Welcome to the Radware Conference Call discussing Second Quarter 2023 Results, and thank you all for holding. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. As a reminder, this conference is being recorded August 2, 2023. I would now like to turn the call over to Yiska Erez, Director, Investor Relations at Radware.

Operator

Please go ahead.

Speaker 1

Good morning, everyone, and welcome to Radware's Q2 2023 earnings conference call. Joining me today President and Chief Executive Officer and Gaia Vidan, Chief Financial Officer.

Speaker 2

A

Speaker 1

copy of today's press release and financial statements For the Q2 are available in the Investor Relations section of our website. During today's call, we may make projections and forward looking statements regarding future events performance of the company. These forward looking statements are subject to various risks and uncertainties and actual results could differ materially from other words current forecasts and estimates. Factors that could cause Differences include, but are not limited to, from the changing or severe global economic conditions, the COVID-nineteen pandemic, General business conditions and our ability to address changes in our industry, changes in demand for products, Amount of orders and other risks detailed from time to time in Radware's filings. We refer you to the documents that the company files and furnishes from time with the SEC, specifically the company's last annual report On Form 20 F as filed on March 30, 2023.

Speaker 1

We undertake no commitment to revise or update any forward looking I will now turn the call to Roy Disapel.

Speaker 3

Thank you, Iskari, and thank you all for joining us today. We ended the Q2 of 2023 with revenues of $65,600,000 The non GAAP earnings per share of $0.10 Total ARR growth accelerated to $208,000,000 compared to a 5% growth recorded in the Q1 of 2023. Our cloud security business had another strong quarter. Cloud ARR growth accelerated to 23%, Reaching $59,000,000 at the end of the second quarter. This strong cloud performance was reflected across multiple metrics, including cloud bookings, new logos and the total number of cloud customers, which all grew double digits.

Speaker 3

The growing cloud business and the growth in our product subscriptions are gradually forming a sustainable and durable SaaS business line. This progress is reflected in the steady growth in recurring revenue, which increased by 7% in the quarter and now accounts for 79% of total revenues as compared to 65% in the Q2 of last year. While the cloud security business Produced strong results in the Q2. The appliance encountered strong headwinds, Which we believe is a temporary pullback. The spending patterns of large customers have impacted CapEx purchases.

Speaker 3

Over the last few weeks of Q2, we witnessed increased delays in closing large on prem deals globally, Primarily among large enterprises and carriers. To the best of our knowledge, we have not lost To that end, we have proactively taken steps to optimize and align our goals and maintain stronger profitability. We reduced sales and marketing expense and reallocated spend towards growth markets in our cloud delivery and go to market efforts. Guy will elaborate more on this in his remarks. While large and Service providers consider their investments more carefully.

Speaker 3

Strengthening cyber defenses remain a business priority. Organizations around the world are experiencing a dramatic increase in sophistication of cyber attacks. In the first half of twenty twenty three, we are observing a significant shift in the DDoS market pattern. Increasingly, DDoS attacks are incorporating a mix of Layer 3, 4 and Layer 7 attack vectors. The Layer 7 DDoS or Web DDoS attacks are not about sheer capacity of traffic.

Speaker 3

Rather, they are encrypted high volume requests per second that evade standard web application firewalls and network based DDoS tools. The attacks hit many large enterprises across different countries and industries, airports and healthcare organizations. Microsoft, which was among the affected organizations, disclosed multiple waves of Layer 7 attacks that caused outages in services like Azure, Outlook and OneDrive. To mitigate these web DDoS attacks, we introduced our new Cloud Web DDoS Protection Service. The WebDDoS service is based on 2 years of AI algorithm and has uniquely positioned us to combat this emerging Generation of aggressive Layer 7 attacks which are leaving companies vulnerable.

Speaker 3

Our behavioral based solution The attack by 2 orders of magnitude higher than any on prem solution And unlike any other solution in the market, it surgically blocks without blocking legitimate traffic. With the fast training of our business and excellent proven results in dozens of customers, We are also executing a strong market differentiator that will set the ground for future DDoS Cloud and appliance growth for our business. In the Q2, we also made calls to our bot manager, which are part of the 360 degree cloud application protection. The advanced solution prevents bots from bypassing additional security controls to gain unlawful access to native Android an iOS mobile application. It offers first to market integrated authentication for both iOS and Android devices And new identity algorithms allowing organizations to defend themselves against both attacks with the highest accuracy and performance.

Speaker 3

Our investment in cloud innovation continued to pay off. I would like to share with you a few examples of the deals Demonstrate the critical value we bring to our customers and contributed to our cloud ARR growth in the second quarter. We closed the deal with 1 of the largest transportation hubs in North America. This Customer didn't have active DDoS protection for its data center. Instead, it was using a public cloud WAF solution.

Speaker 3

While we were engaging with the customer, it was hit with a wave of DDoS attacks that were targeted at the region. When the cloud provides, The customer recovered under our emergence. This enabled us to showcase our capabilities in real time and win the business. We also closed an important cloud DDoS deal with a large Tier 1 carrier and managed security service provider in Asia Pacific. Recent analysis and government organizations impacted the provider's ability to protect some of its customers properly And expose the weakness in the incumbent solution ability to mitigate this new wave of attacks.

Speaker 3

Our leaders Indidos mitigation and proven expertise in these verticals position us as the go to vendor to replace the incumbent and pave the way Going forward, we intend to continue Cloud security strategy and our SaaS business model, which is an even more resilient and durable business model. Together with continuous improvement in our go to market and our expectations for recovery in the on prem purchases, We trust we can strengthen our company performance. We are confident in our leadership position in our technology and products, We have significant advantages in mitigating real time cyber attacks for large enterprises and carriers. We have a superb customer base and we are becoming more and more critical to our customers' operations. All these assets It positions us very well to achieve our long term targets.

Speaker 3

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 business Form us for the Q2 of 2023 as well as our outlook for the Q3 of 2023. Before beginning the financial overview, I'd like to remind you that unless otherwise indicated, all financial results are non GAAP. A full reconciliation of our results on a non GAAP basis is issued earlier today And on the Investors section of our website, revenue For 2023 was $65,600,000 compared to $75,100,000 In the same period of last year, as Roy mentioned, the decline in revenue Was due to large enterprises and service providers delaying the closing of large on prem deals. The behavior pattern intensified in the last quarter of the second quarter.

Speaker 4

We believe that some of the related to macro environment and budget constraints. Despite the macro headwinds And in accordance with our strategy, our cloud business continued to perform well also in the second quarter. Cloud ARR in the Q2 of 2023 grew 23% year over year to $59,000,000 Compared to $48,000,000 at the end of the second of the end

Speaker 2

of the

Speaker 4

2022. Cloud ARR accounted for 28% of total ARR compared to 25% last year. The growth of our cloud business is reflected in our recurring revenue, which increased 7% year over year And now accounts for 69% of total revenue compared to 65% in Q2 2022. Increase in recurring revenues despite the headwinds we are witnessing, seeks to more resilient subscription based business model. Our regional breakdown revenues in the Americas in the Q2 of 2023 was $27,000,000

Speaker 2

Representing a 10% on a

Speaker 4

trailing 12 month basis, Americas revenue decreased by 6%. EMEA revenue in the Q2 was $23,000,000 compared to $30,000,000 in Q2 2022, A decrease of 24% year over year and 11% decrease on a trailing 12 month basis. Of the Americas and EMEA region is related to the decrease in sales of appliance based product in the quarter, predominantly to carriers and large enterprises. Finally, APAC revenue in the 2nd quarter was $16,000,000 Which represent an increase of 3% year over year. On a trailing 12 month basis, APAC revenue was flat.

Speaker 4

Americas accounted for 41% of total revenue in the 2nd quarter. EMEA accounted for 30 4% of total revenue and APAC accounted for the remaining 25% of total revenue in the 2nd quarter. Gross margin in Q2 2023 was 82.3% compared to 83.3% in the same period in 2022. The change in gross margin is mainly attributed to higher costs related to Cloud Security Center launched During the last year, we expect to see a decline in revenue. Operating expenses in the 2nd quarter were 52,000,000 At the lower end of guidance, representing compared to the same period in 2022.

Speaker 4

Financial income continues to grow and reached $3,400,000 in the 2nd quarter as a result of higher interest rates in the market. Net income in the 2nd quarter was 4.5 compared to $8,100,000 in the same period last year. Radware's adjusted EBITDA for the The quarter was $4,100,000 which includes 2.5% of the gross profit of the HAWKS business. Diluted earnings per share for Q2 2023 was $0.10 compared to $0.18 in Q2 20 20. Turning to the cash flow statement and the balance sheet.

Speaker 4

Operating activities in Q2 2023 was $4,900,000 compared to $32,000,000 in the same period of last year. The lower cash flow from operation is attributed to the lower net income in Q2 2023

Speaker 3

2020 2.

Speaker 4

In the third revenue in Q2 2023 relative to the large increase in deferred revenue in Q2 2022. During the Q2, we repurchased Shares in the amount of approximately 19,700,000 out of the $100,000,000 share repurchase plan that we have in place. As of 2023, the $35,000,000 remained in our share repurchase plan. We ended the segment with approximately cash equivalent, short term bank I'll conclude my remarks with guidance. Although the macroeconomics headwinds are temporary, we can't beat the timing and intensity.

Speaker 4

During this time, Radware is mindful and is agile in adjusting its cost structure as needed. We are taking few steps including resource reallocation and headcount reductions. These steps will be

Speaker 2

in line with our expectations

Speaker 4

and will enable us to continue to improve our business.

Speaker 3

We are committed to profitability over time.

Speaker 4

For the Q3 of 2023 to be in the range of $61,000,000 to $64,000,000 We expect Q3 2023 non GAAP operating expenses to be between $51,000,000 $52,500,000 and headcount reduction, we expect our OpEx Decrease to approximately $50,000,000 exiting 2023. We expect non GAAP diluted net earnings per share to be between $0.06 $0.10 in the Q3 of 2023. I'll now turn the call over to the operator for questions.

Operator

Thank you. We'll take our first question from George Notter at Jefferies.

Speaker 5

Hi, guys. Thanks very much. I guess I wanted to ask about the change in the sales incentive plans. I know that you You guys made some changes coming into the year. I know you tilted the plan more away from appliances and towards the cloud business.

Speaker 5

But Is that having an impact on appliance sales? Is that part of the narrative here also? And then on the macro environment, I guess I'm just wondering why you only started to see this kind of towards the end of the quarter. Was there something about the environment that kind of changes dynamics for you in the marketplace? Or Is this something that's been building over time?

Speaker 5

Thanks.

Speaker 3

Yes. So first, regarding the compensation plan, we did move The

Speaker 2

call is

Speaker 3

being recorded and I'm sure it has some impact. I think that's the major one In this regard, it's obvious that our sales force is more cloud based sales like we wanted it to be. And I don't think that we

Speaker 2

have a lot of customers

Speaker 3

that would change the dynamic. It might be more towards the new Our decline came existing customers, so I don't think that's the main That's the main cause. It might have effect like you mentioned in general, but I would not call it a top one in this area. Regarding the way the quarter progressed, we started with guidance that we still took into account, The environment and the challenge. And as we've mentioned, the main difficulties we've experienced were in existing where we felt we have good understanding of the environment, process, etcetera.

Speaker 3

Therefore, we were surprised In the last several weeks of the quarter, although everything was tracking well all that time To get those push outs, budget cancellations, etcetera. We tried to take Of course, when we built the guidance for Q3, the phenomena that we saw and to take a way more cautious and conservative view also on the existing customer business where we feel we are positioned very well, the value is proven, we are blocking attacks in real time, There's a high user satisfaction, as you can see from the ARR retention rates. And so we feel good about our position, but we do need to find a way to accelerate those on prem purchases also in our existing customer.

Speaker 6

Great.

Speaker 2

Thank you.

Operator

And we'll move next to Tim Horan at Oppenheimer.

Speaker 7

Hi. This is Grant Paz on the line for Tim Horan. So just on the AI front, I just wanted to hear about what kind of trends you've seen across the security landscape versus This year versus last year, and you mentioned AI with some of these cloud DDoS service and layer 7 attacks. So I guess, kind of how you guys are thinking about the impact of AI to your business kind of over the second half of this year and really going into 2024?

Speaker 3

So first, the real time mitigation, detection and mitigation. On one hand, we are deepening the usage of algorithms constantly. We started with that many years ago. We have a whole battery of different algorithms across our DDoS WAF bot API security that has been for years our competitive advantage. Prepared remarks for Web DDoS, we believe we are enhancing our competitive advantages using algorithms.

Speaker 3

We are using AI not only for remediation or accelerating certain processes, but for the actual detection and mitigation. That's a bit unique in the market. So that's on our front. I think it improves our capabilities. It improves our Efficacy, it improves time.

Speaker 3

There's a lot of benefits for AI in our land of security. At the same time, the hackers are also leveraging more and more algorithms, more and more AI. For instance, those Layer 7 attacks, web DDoS attacks I referred to, they are way more real user traffic than we ever saw before. And that poses a huge challenge for the defense, Because those sessions, these attack looks very, very similar to normal legit traffic. So by using algorithms also on the attacker side, I would say the sophistication, the level of the challenge It's increasing significantly.

Speaker 3

Taking those two parameters into account together, I believe the barrier to entry So, mitigating real time attacks is getting higher and higher. You would need to have years of investment in those algorithms, understanding And therefore, competitively, although on one end you can say getting higher, the difference needs to invest more. All of that is true, but competitively, I think it's actually A good phenomena for our

Speaker 7

Got you. Thanks. And just as one quick follow-up. Just looking at ARR specifically the Non cloud portion of ARR, it looks like it's kind of fluctuated around that $145,000,000 range. So I'm just curious as customers move to the cloud, What kind of uplift are you guys seeing in ARR?

Speaker 7

So for every dollar like non cloud ARR, what kind of conversion is that To the cloud and or is that not the right way to think about it? Thanks.

Speaker 3

I think there are 3 buckets in our 1 is the cloud that has accelerated. 2nd is product subscription Our software that we sell as a subscription business is also growing and has grown nicely in the last quarter and Maintenance of appliances that is more tied to the installed base and so Definitely, we're seeing traction in all our subscription product and cloud that's growing consistently. And I think the maintenance would be more in line with our product sales. In some of our Cloud can bring with them also appliance sales, namely the hybrid Didos. In most of our Business, for example, ADC and DDoS on prem, those have no relation to the Our business is not cannibalizing nor it's supporting today the sale of ADC.

Speaker 3

We are working of course to create Between our cloud security to the ADC, to the DDoS on prem to accelerate that and as the year progresses, I think we would launch Federal of such modules to create stronger ties between the 2. But today, we're enjoying cloud growth that is Unrelated basically to the product they have.

Speaker 7

Great. Thanks.

Operator

We'll take our next question from Tavy Rosner at Barclays.

Speaker 6

Questions. I wanted to touch on OEMs and also on EMEA. So I just wanted to check if the traction with OEM is in line with the broader revenue dynamics that we've seen. And I also noticed that the declines in EMEA was a bit Eeper than the rest of the geographies. So just wanted to get some colors on both of these points, please.

Speaker 3

I'll take the OEM. We actually continue to see good traction with We've mentioned in the Analyst Day that Cisco cloud solutions into their Cloud DevOps solution into their segment. We're starting to see more activity from our OEMs in the cloud and they continue to contribute good level of new customers And there's now nice numbers coming from the OEM channel. We're definitely seeing growth year over year from that channel.

Speaker 4

Hi, Tavya. And regarding your question about EMEA, so comparing to last year, we had One extraordinary deal in the Q2 of 2022, that's one. The second thing as we mentioned, All in all, we believe our business is

Speaker 6

Okay. Thanks for that. And just looking at capital allocation, given your significant cash position, have you considered Changing the pace in terms of buybacks and any other considerations there?

Speaker 4

So as mentioned, we're running on a $100,000,000 plan. We still have as of June 30, dollars 35,000,000 Obviously, prices share prices changes and as The state of repurchase will change as well.

Speaker 6

Great. Thanks for taking my questions.

Speaker 3

Thanks, Harvey.

Operator

And we have no further questions at this time. I'll turn the call back to Roy Zisapel for closing remarks.

Speaker 3

Thank you everyone and have a great day.

Operator

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

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