Radware Q4 2023 Earnings Call Transcript

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February 7, 2024

There are 6 speakers on the call.

Operator

Welcome to the Radware Conference Call discussing 4th quarter and full year 2023 results, and thank you all for holding. As a reminder, this conference is being recorded February 7, 2024. I would now like to turn this call over to Yiska Erez, Director, Investor Relations at Radware. Please go ahead.

Speaker 1

Thank you, Ian. Good morning, everyone, and welcome to RadNet's 4th quarter and full year 2023 earnings conference call. Johnny me today, our role is the Super President and Chief Executive Officer and David Dunn, Chief Financial Officer. A copy of today's press release and financial statements as well as the investor feed for the Q4 and full year 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.

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. Factors that could cause or contribute to such differences include, but are not limited to, impact from 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, The timing in the amount of orders and other risks differ from time to time in Radware's filings. We refer you to the documents that 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 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 Zisapel.

Speaker 2

Thank you, Iskha, and thank you all for joining us today. We ended the Q4 of 2023 with revenue of $65,000,000 and non GAAP diluted earnings per share of $0.13 In the Q4 of 2023, total adjusted ARR, as discussed in our last earnings call, grew to $211,000,000 a 7% increase compared to the same period in 2022. The ARR growth is driving recurring revenues, which accounted for 77% of total revenue in 2023. This is a 900 basis point increase compared to last year. The total ARR growth was fueled by cloud ARR growth of 22%, once again exceeding 20% year over year growth and reaching $65,000,000 Subscription revenue that is comprised of cloud and product subscriptions accounted for 44% of total revenue in the 4th quarter, as well as for the full year reaching $115,000,000 for 2023.

Speaker 2

With that, we are making strong and steady progress to a cloud security as a service company. Looking forward, we are cautiously optimistic about 2024. First, we witnessed a better business environment in the Q4. In addition to growth in our cloud and subscription business, We saw early signs of recovery in closing large CapEx deals, specifically across Europe and Asia Pacific. The recovery is also reflected in the pipeline and the progress we made moving existing projects forward.

Speaker 2

2nd, the demand in the market for cyber protection solutions continue to be solid as attacks intensify. According to our full year 2023 Global Threat Intelligence report, the number of DDoS attacks per customer grew by 94% compared to 2022. In addition, we observed a surge in malicious web application and API attacks, which rose 171% last year. A significant part of this increased activity was driven by Layer 7 web application attacks or web DDoS attacks, a trend that has not slowed down. We believe the frequency, complexity and sophistication of cyber attacks would intensify throughout 2024.

Speaker 2

Organizations regardless of geography or industry are facing increased cyber threats driven by a major geopolitical tensions and conflicts. This plays directly to our value proposition, real time protection against application and data center attacks. 3rd, we are confident we have the right solutions in place to address the emerging trends in the marketplace. To stay ahead of the attackers, we are continuously enhancing our offering with new algorithms and capabilities. One example is the web DDoS attacks.

Speaker 2

These Layer 7 attacks emerged last year in caught companies that rely on pre existing signatures or rate based detection off guard. Our cloud Web DDoS protection continues to be unmatched in its ability to mitigate web DDoS attacks based on a battery of algorithms we added last year. In the Q4, we announced an on premise version of our web BDoS protection with Defense Pro X. This solution offers companies comprehensive protection against these attacks without decrypting incoming traffic or adding latency. We believe this significant capability will strengthen the traction for Defense Pro X in the market, boosting our appliance business.

Speaker 2

Another example is the recent expansion of our Bot Manager module in our cloud application security offering. We recently enhanced our solution to detect and mitigate the latest generation of bot threats, those that are developed with the help of generative AI tools. These new enhancements enable organizations to defend against attackers who try to evade detection by exploiting vulnerabilities, rotating identities, manipulating headers, using capture forms and more. The 4th reason we are cautiously optimistic about 2024 is the sustained growth of our cloud business. The cloud security ARR continues to grow over 20% year over year.

Speaker 2

We believe we can maintain this growth rate throughout 2024. We are diligently expanding and enhancing our cloud offering, creating more opportunities to cross sell and up sell within our customer base. We are also expanding our geographic footprint in the market, working with our MSSP and OEM channels. The cloud security market is large and growing with opportunities that we intend to capitalize on. Finally, our optimistic outlook is strengthened by the positive momentum behind our OEM relationships.

Speaker 2

During 2023, we expanded our business with Check Point and in particular with Cisco. Our inclusion in Cisco Enterprise Agreement has created many opportunities that we will build upon in 2024. Before I conclude my prepared remarks, I would like to share with some of the notable deals that we closed in the Q4 of 2023. For example, With positive momentum beginning to return behind large CapEx deals, we expanded our long term relationship with 1 of the top 5 carriers in the world. In a multimillion dollar deal, the customer has extended the DDoS protection for its data centers.

Speaker 2

We also closed a multimillion dollar deal with a leading telecom company in Asia Pacific. After winning its MSSP business in the second quarter, We successfully cross sold our on premise DDoS and cloud application security solutions in the Q4, Replacing 2 different incumbents. This deal highlights the strengths and breadth of our solution. In another customer expansion, we closed a large deal with a government agency in Asia Pacific. The customer launched a series of data centers to accommodate the growing customer base.

Speaker 2

We sold our entire product portfolio to them, including an upsell of our Altium application delivery controller and our DDoS and cloud DDoS protection. This is another win that showcased success we have capitalizing on our full portfolio. In summary, We closed 2023 on a positive note. During the Q4, we made important progress on our strategic initiatives. We continue to successfully grow our cloud security business, taking our claim as a cloud security as

Speaker 3

a service company.

Speaker 2

With strong cloud security opportunities ahead of us, positive signals in overall customer spending and continued cost discipline, we remain cautiously optimistic about 2024. We look forward to a return to top line growth and improved profitability. With that, I would like to thank our employees around the world for their continued efforts and 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 Q4 full year of 2023 as well as our outlook for the Q1 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 Q4 2023 was $65,000,000 compared to $74,100,000 in the same period of last year.

Speaker 3

Revenue for the full year 2023 was $261,300,000 compared to $293,400,000 in 2022. The decline in revenue is attributed to delays in closing large deals due to greater budget constraints by customers, primarily in the Americas. However, as Roy highlighted, we do see encouraging signs of improvement in macro headwinds and as a result, in customer spending. These positive signs are reflected in increased RPO at year end and more traction to our solutions. In the Q4, the Cloud Security business, which is the growth engine of the company, continue to excel proceeding, reducing cloud ARR growth of 22.5% year over year, reaching $64,900,000 compared to $53,000,000 taking us another step towards becoming a cloud Security as a service company.

Speaker 3

Our security business portion accounts for the large majority of total business of Radware. On a regional breakdown, revenue in the Americas in the Q4 of 2023 was $24,600,000 compared to $31,900,000 in the same period last year, representing 23% decrease year over year. Revenue in the Americas for the full year of 2023 declined 17% year over year to $103,400,000 compared to $123,900,000 in the same period last year. EMEA revenue in the Q4 of 2023 increased 2% year over year to $24,900,000 EMEA revenue for the full year 2023 was $96,500,000 compared to $104,200,000 in 2022, a 7% decline year over year. APAC revenue in the Q4 of 2023 was $15,500,000 which represents decrease of 13% year over year.

Speaker 3

For the full year of 2023, APAC revenue by 6% compared to 2022 to $61,400,000 For the Q4 of 2023, Americas and EMEA accounted for 38% of total revenue each and APAC accounted for the remaining 24% of total revenue. For the full year 2023, Americas accounted for 40% of total revenue, EMEA accounted for 37% and APAC accounted for 23% of total revenue. I'll now discuss profits and expenses. Gross margin in Q4 2023 was 82% compared to 82.7% in the same period in 2022. The change in gross margin is mainly attributed to decline in revenue.

Speaker 3

Gross margin for the full year 2023 was 81.9% compared to 83% in the full year of 2022. Similar to the last couple of quarters and to align the level After company operation, we continue to reduce our operating expenses in the 4th quarter to below $50,000,000 We are minded to our expenses, and we expect to improve our profitability going forward due to continued expense discipline. While we reduce operating expenses, we believe that this expense structure is efficient to operate the business and enable our future growth. Financial income continued to grow year over year and reached $3,800,000 in the 4th quarter as a result of higher interest rates in the market. Tax rates for the Q4 full year of 2023 was 24.3% 17.7% respectively, compared to 12.5% and 14.1% in the same period of last year.

Speaker 3

The increase in our tax rate for the Q4 of 2023 is primarily due to a catch up related to end of year updated The increase in our tax rate for 2023 was primarily due to lower pretax income for this period and expenses derived from our foreign subsidiaries, which are subject to tax based on costs and not profits. Net income in the Q4 was $5,500,000 compared to $7,700,000 in the same period last year. Net income in the full year of 2023 was $18,900,000 compared to $31,300,000 in 2022. Radware's adjusted EBITDA for the 4th quarter was $5,400,000 which include a negative EBITDA of $2,700,000 from the Hawx business. Adjusted EBITDA for the full year of 2023 was $17,600,000 which includes $10,800,000 negative EBITDA from the Hawx business.

Speaker 3

Diluted earnings per share for Q4 2023 was dollars 0.13 compared to $0.17 in Q4 2022 and $0.43 for the full year of 2023 compared with CAD 0.68 for the same period of last year. Turning to the cash flow statement and balance sheet. Cash flow from operation in Q4 2023 was $2,700,000 compared to $9,600,000 in the same period of last year. Cash flow from operation in the full year of 2023 was negative $3,500,000 compared positive cash flow from operation of $32,100,000 in 2022. The lower cash flow from operation arise from a lower profitability discussed above.

Speaker 3

During the Q4 and the full year of 2023, we repurchased shares in the amount of approximately $10,000,000 $60,000,000 respectively. As of December 31, 2023, Approximately $66,000,000 remained in our share repurchase plan. We ended the 4th quarter with approximately €364,000,000 in cash, cash equivalent, bank deposit and marketable securities. I'll conclude my remarks with guidance. We expect total revenue for the Q1 of 2024 to be in the range of $62,000,000 to $64,000,000 We expect Q1 2024 non GAAP operating expenses to be in between $49,000,000 to $50,500,000 We expect Q1 2024 non GAAP diluted net earnings per share to be between €0.12 and €0.14 I'll now turn the call over to the operator for questions.

Speaker 3

Operator, please?

Speaker 1

Thank

Operator

Our first question comes from the line of Alex Henderson with Needham. Your line is open.

Speaker 2

Great, thanks.

Speaker 4

Just a couple of housekeeping to start off with. Can you talk a little bit about the direction of the interest line? It's hard for us to forecast it externally. And I would assume that interest rates starting to roll over that the interest rate might be coming down in 2024 and don't want it to have a bad forecast on that. So can you give us some sense of what you think that's going to do?

Speaker 3

I think some headwind in terms of reduced interest rate throughout 2024 as well as lower cash balance in 2024 versus 2023. But at the same time, we have tailwind. We still have or had bonds in 2023 with lower interest because they were long term bonds. So overall, The 3.8% we posted in Q4, we expect more or less same level of interest income in 2024 Q4.

Speaker 4

Great. And just any guidance on the percentage tax rate that we should be thinking for the year?

Speaker 3

The way we see for 2024, 15% tax rate will be visible.

Speaker 4

So no change in that, great. You do seem to have a little bit more confidence in the outlook. It does sound like the trajectory is starting to recover. Can you talk a little bit about what the pipeline looks like? What the how many is there an increase in large deals?

Speaker 4

Is The closure rate improving? Is the duration of the time to close deals stable or improving? What are the mechanics that give you that confidence?

Speaker 2

Yes. Okay. So several points on that. So first, we started to see some first large deals closing in Q4. If you look on Q3 3 or Q2, we had challenges on closing those over $1,000,000 deals.

Speaker 2

2nd, the pipeline that was there was not moving towards close at the regular rates that we've seen. In Q4 and also since beginning of this year, we're starting to see some of the deals moving forward. It's not Completely back to previous levels, but definitely better. And that's why we chose the term cautiously optimistic. It's definitely better.

Speaker 2

It's also better, by the way, in North America. So some of the deals that we had in the pipeline, some other deals are opening up. Customers are more optimistic on their budgets and their ability to leapfrog the security infrastructure going forward. So overall, I would say it's neutral to positive across the world, And hence, we're feeling more positive about it as well.

Speaker 4

So just to be clear, what you're saying there is That deal closure time had been expanding. It took longer to close the deal and now you're starting to see that improve. Is that what I'm hearing?

Speaker 2

Yes. And before it's not even expanding, they were not closing. They were just pushed from quarter to the other. So now we started to see early signs of close and more concrete discussions in some other opportunities that Give us confidence those will be closing probably in the first half of twenty twenty four. So definitely we're seeing good signs there.

Speaker 2

By the way, you couple that with the growth that we had during all recent years, including 2023 in cloud Security, which we believe we can maintain that momentum. So overall, we obviously feel better. And last but not least, I mentioned that our RPO is now at record level, ARR is at record level. Obviously, all of that gives us more visibility towards 20 24.

Speaker 4

Sure. Absolutely. Just one last question on the cost side of the equation. Is it reasonable to think that we should be using that Kind of $49,000,000 to $55,000,000 range for all four quarters. Is that kind of the cost structure for the year?

Speaker 3

Yes.

Speaker 4

Thanks. Perfect. Thank you. Thanks,

Operator

Our next question comes from the line of Chris Ramer with Barclays. Your line is open.

Speaker 5

Hi, thanks for taking my question and congratulations on the strong results. You mentioned the weakness In North America recently and the gradual pickup that you're seeing now, I was wondering if you talk about any other challenges or headwinds you're seeing maybe playing out through the year aside from that as deals start to close faster and you get a little more momentum?

Speaker 2

I think for us, this is by far the largest challenge we see. We are looking obviously for a better year in 2024 in North America. But overall, we feel that the Results internationally were good as it relates to us. We don't foresee specific Unique headwinds to us beyond the regular geopolitical China, Russia, the regular geopolitical challenges in the economy for us. But as it relates to us, I think it's North America predominantly.

Speaker 5

Okay. And regarding Skyhawk, could you give us like an overview of the evolution of the business there and When you might think it will start to impact the business?

Speaker 2

Yes. So Skyhook is focused on the new niche market in public cloud Security, which is called Cloud Detection and Response, CDR. It's a very new market. There are other startups in that, but it's basically talking or addressing the need in real time to detect intrusion into your public cloud account and block it before the hackers are able to steal the valuable data, Identities and so on. The solution is heavily based on machine learning and AI algorithms that's Based on multiple malicious indicators, are able to understand whether what we are seeing, the anomalies we see are actually part of a kill chain or an attack that is actually developing in real time.

Speaker 2

I think the solution is very advanced and unique in the market. We are adding a lot of usage of generative AI to detect new attacks as well as create new sensors and in real time improve the product. But again, it's very early. I would not foresee in 2024 material impact on Radu revenues. As you see, we do consolidate the losses, although the company is fully funded And that is our EPS.

Speaker 2

But we are strong believers in the technology, in the Positioning, we think there will be a very good opportunity for shareholder value in public cloud security with Skyog, And we look forward to their success.

Speaker 5

Great. Thanks. That's nice color. That's it for me.

Speaker 3

Thank you.

Operator

There are no further questions at this time. I would like to hand the call back over to Roy Zisapel for some closing remarks.

Speaker 2

Thanks a lot. Thank you for joining us and have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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Key Takeaways

  • In Q4 2023, Radware reported revenue of $65 million (down from $74.1 million) and non‐GAAP EPS of $0.13 versus $0.17 a year ago, with full‐year revenue falling to $261.3 million from $293.4 million.
  • Total adjusted ARR grew 7% year-over-year to $211 million, driving recurring revenues to 77% of total and cloud ARR up 22% to $65 million.
  • Cyber threats accelerated in 2023, with DDoS attacks per customer up 94% and web application/API attacks surging 171%, underscoring strong demand for real-time protection.
  • Radware launched new innovations, including the on-premise Defense Pro X for Layer 7 DDoS protection and enhanced Bot Manager with AI-driven defenses against next-generation bot threats.
  • Management is “cautiously optimistic” for 2024 after early signs of large CapEx deal recovery in EMEA and APAC and provided Q1 guidance of $62–64 million revenue and EPS of $0.12–0.14.
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Earnings Conference Call
Radware Q4 2023
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