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spk09: Welcome to the Radware conference call discussing fourth quarter and full year 2021 results, and thank you all for holding. As a reminder, this conference is being recorded today, February 9th, 2022. I would now like to turn this call over to Yiska Erez, Director of Investor Relations at Radware. Please go ahead.
spk00: Thank you, operators. Good morning, everyone, and welcome to Radware's fourth quarter and full year 2021 earnings conference call. Joining me today are Roy Disipel, President and Chief Executive Officer, and Gil Kivoli, VP Finance. A copy of today's press release and the financial statements, as well as the investor piece for the fourth quarter, are available in the investor relations section of our website. During today's call, we may make projections or other false blocking statements regarding future events or the future financial performance of the company. These forward-looking statements are subject to various risks and uncertainties, and actual results differ materially from models' current forecasts and estimates. Factors that could cause or contribute to such differences include, but are not limited to, impacts from the COVID-19 pandemic, general business conditions, and our ability to address changes in our industry, changes in demand for the product, the timing in the amount of orders, and other risk details from time to time in broadway filing. 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 April 20, 2021. We undertake no commitment to revise or update any forward-looking statement in order to reflect events or circumstances after the date of such statement is made. I will now turn the call to Roy Dissifer.
spk10: Thank you, Iska, and thank you all for joining us today. Q4 was another record quarter, which closed the record year for hardware. Our strategy to grow our cybersecurity and cloud services has proven very successful. In turn, we've made great progress transitioning from mainly a product-based perpetual license revenue model a revenue model that is based largely on ARR and subscriptions. The evidence of this shift is reflected in our 2021 performance. Total ARR reached a record of $190 million. Cloud and subscription ARR grew 23% year-over-year. Cloud and subscription revenues grew 44% year-over-year to $93 million. And now they account for 32% of total revenues, up from 26% in 2020. And we exited 2021 with a run rate of more than $100 million of subscription revenues. Looking forward, we see great momentum and significant potential in continuing to grow our data center and application security offerings. Our customers are advancing their multi-cloud infrastructure and have an elevated need for a strong security strategy. This is a huge market opportunity for us. It is further magnified by an extremely active cyber attack environment, and our recent statistics demonstrate that. Number of denial of service attacks that we blocked during 2021 increased by 45% compared to 2020. The web application attacks blocked by us grew by 88% and bot attacks increased by 123% year over year. Based on these market drivers, the resulting needs for best-in-class cloud security and our technology leadership, we continue to win many new customers and grow our existing relationships. In the fourth quarter, we closed several large cloud deals. For example, A Fortune 500 financial services company chose our Cloud DDoS solutions for our worldwide deployment to better protect and serve the global operations. Our global network footprint and quality, together with our security leadership, were the reasons noted by this new customer. Our bot manager also earned us a seven-digit deal from a Fortune 500 customer and one of the largest e-commerce organizations in the world. After we displaced a competitor solution a year ago, based on last year's success in blocking real-time attacks, this customer extended and expanded the scope of our agreement in our largest bot manager sale to date. Our state-of-the-art technology continues to be a major driver in the purchase decisions of both our new and existing customers. In the fourth quarter, we continue to evolve our solutions, features, and capabilities. In our cloud AppSec service, we significantly strengthened our API security with the introduction of the API discovery module. This feature uses an advanced machine learning algorithm to identify undocumented and legacy APIs that are hard to observe and control. Protecting APIs is paramount since hackers and bots can use broken or exposed APIs as an entry point and from their launch a full site. We also recently released our integrated content delivery network or CDN. that is now part of our cloud AppSec offering. In the fourth quarter, we closed our first deals with our integrated CDN solution. For example, a multinational conglomerate company in Asia Pacific that spans many industries purchased our complete cloud WAF, BOT, and CDN solution. The company, which was an existing customer of our ADC and DDoS protection products, was looking to consolidate and centralize control of those services. The customer decided to expand its relationship with Radwell due to our superior technical solution and our strong strategic relationship.
spk01: The fourth quarter was a strong quarter in carriers and service providers.
spk10: As a result of infrastructure transformation and the evolving threat landscape, carriers and service providers are facing unprecedented level of attacks on their customers. Having to deal with new cybersecurity demands, they are looking to strengthen their security infrastructure. Following that, we start to witness expansion in their investments, and we closed multiple deals in the fourth quarter with major carriers, existing customers, and also new customers that look to replace their incumbent vendor. One of the largest European carriers needed to increase the security capacity based on the traffic growth within its mobile network. This carrier is a long-term satisfied DefensePro customer and awarded us a seven-digit expansion deal. Another example is a new customer to AdWords that we won through our Cisco OEM relationships. This Asian carrier was looking for a new DDoS solution. The customer acknowledged our superior technology and decided to replace the incumbent vendor and upgrade to our solution. In closing, we are very pleased with our performance in 2021. We executed well, achieved double-digit revenue growth each quarter and for the full year, and record revenues for Q4 and 2021. We also grew our subscription business to $93 million and generated healthy operating income, earnings per share, and record cash flow from operations. In 2021, we witnessed an increased demand for our security solutions. The total addressable market is large and offers tremendous opportunities in the future. In order to address these opportunities over the coming quarters, we are increasing our investment in field and marketing resources and accelerating investments in our cloud infrastructure and solutions. I would like to thank all of Radwar employees around the world for their dedication, execution, and contribution to our 2021 results. I will now turn the call to Gil, who will review the financial results. Gil?
spk05: Thank you, Roy, and good day, everyone. I'm pleased to provide the analysis of our financial results and business performance for the fourth quarter and full year of 2021. I would like to remind you that unless otherwise indicated, all financial results are non-GAAP. Reconciliation between the GAAP and non-GAAP results for the quarter are detailed in our press releases. We had a strong quarter and a remarkable year with both the top and bottom line growing double digits in 2021 compared to 2020. Revenue for the fourth quarter 2021 was record, $76.6 million, an increase of 11% compared to the same period in 2020. Full year 2021 revenue was also a record, reaching $286.5 million, an increase of 15% compared to 2020. Looking at geographies, 2021 revenue in the Americas grew 14% in the fourth quarter and 13% during the full year to $31 million and to $129 million, respectively. 2021 revenues in EMEA grew 23% in the fourth quarter and 26% during the full year to $30 million and $98 million, respectively. APEC revenues in the first quarter of 2021 were $16 million compared to $17 million in the same period in 2020. For the full year 2021, APEC revenues increased 4% to $59 million compared to $57 million in 2020. I will now discuss expenses and profits. Gross margin for the fourth quarter of 2021 was 82.4%, compared to 83.1% in the same period in 2020. For the full year of 2021, gross margin was 82.4%, compared to 82.8% in 2020. Our gross margin can fluctuate from quarter to quarter due to product and geographic mix, as well as costs related to the supply chain. Operating expenses in the fourth quarter of 2021 increased 8% to $52.1 million compared to the same period in 2020. Full year 2021 operating expenses also increased by 8% to $197.3 million compared to $182 million during the same period in 2020. The increase in operating expenses is as a result of higher employee count and commission costs coupled with currency impact, mainly the weakening of the U.S. dollar against the Israeli shekel. Excluding the impact of the weakening of the shekel against the U.S. dollar, operating expenses would have been approximately $1 million and $5 million lower for the fourth quarter and full year 2021, respectively. Nevertheless, we were able to increase our operating income and operating margin. Operating income increased to $11 million in the fourth quarter of 2021 compared to $9 million in the fourth quarter of 2020. In addition, operating margin increased to 14.4% in the fourth quarter of 2021 compared to 13.2% during the same period in 2020. For the full year 2021, operating income increased by 55% to $39 million compared to $25 million in 2020, and operating margin increased to 13.6% in 2021 from 10% in 2020. As discussed in previous earning calls, the declining yield on marketable securities and deposits impacts our financial income, which decreased from $2.2 million in the fourth quarter of 2020 to $1.1 million during the same period in 2021, and from $10.4 million in 2020 to $6.2 million in 2021. Looking ahead, we expect financial income to continue to decrease in the coming quarters. In the fourth quarter of 2021, we decided to take advantage of a special program initiated by the Israeli tax authority that allowed Israeli companies to release trapped profits at a discounted tax rate. Pursuant to this plan and due to the benefit of this program, we elected to participate. The effect of this one-time tax expense related to the release of the trapped profits and fourth quarter gap taxes was $8.2 million. Due to the one-time nature of this expense, we excluded it from the non-gap results. The effective tax rate for the fourth quarter of 2021 was 14.9%, compared to 13.7% in the fourth quarter of 2020, and 15.1% for full year 2021, compared to 13.1% in 2020. The increase of the effective tax rate is related to multi-year tax settlement that occurred in the fourth quarter. The expected tax rate for 2022 is approximately 14 to 15%. Despite the decrease in the financial income and the increased tax rate, earnings per diluted share for the fourth quarter of 2021 increased to 22 cents compared to 21 cents in the same period in 2020, and earnings per share for full year 2021 increased by 25 percent to 81 cents compared to 64 cents in 2020. Turning to the balance sheet and cash flow items, We have a very strong balance sheet. We had record cash flows. Cash flows from operations was $29 million compared to $18 million in the fourth quarter of 2020, and cash flow from operations of $72 million in 2021 compared to $64 million in 2020. During the fourth quarter, we repurchased shares at approximately $17 million And during the full year, we purchased approximately $52 million on shared buyback. We ended 2021 with approximately $466 million in cash, bank deposits, and marketable securities. I will turn the call back to Roy to discuss the outlook for the first quarter and the full year of 2022. Thank you, Gil.
spk10: I will now provide our guidance for the first quarter of 2022. We expect Q1 revenues to be in the range of $72 to $74 million, representing 8% to 11% year-over-year growth. As we highlighted, we are increasing investments in the cloud business, and we expect our operating expenses to be between $50.5 to $52 million. With that, and taking into account the decline in financial income, Q1 revenues Earnings per share is expected to be between 17 and 19 cents. For the full year 2022 revenues, we expect to grow slightly above our three-year target. I will now turn the call over to the operator for questions.
spk01: Operator?
spk08: Thank you. And at this time, I would like to remind everyone, in order to ask a question, please press star 1 on your telephone keypad, and we'll pause for a moment to compile the Q&A roster. And our first question comes from the line of George Nodder with Jefferies. Please go ahead.
spk04: Hi, guys. Thanks very much. Roy, maybe just to kind of continue on that. So in terms of the guidance for the full year, so if I look back, your guidance at one point for the long-term CAGR was 9% to 10%. I assume you're looking for slightly better revenue growth this year than that type of number. Is that mid-teens? Is that low-teens, high-teens? Is there some kind of tighter parameters you can put around that?
spk10: Yeah. Unfortunately, our guidance was 7% to 9%, and that's what I'm looking for.
spk01: Right. Okay. Okay.
spk04: Okay, because I think you, at one point, the long-term growth rate was 9 to 10, and then this is at the analyst day from 2020, and then I think you took it down at one point subsequent to that. Is that, so, okay, so the bogey is, the bogey is 7 to 9%.
spk10: Also in the analyst day, that was the figure. I will send you over after they call the materials.
spk04: Sure, no worries, of course.
spk10: It's in line with that.
spk04: Great. Okay. And then OEM bookings is a number you guys have given us in the past. I think you gave it in terms of compares in prior years, 2020 and 2019. But how did you guys do in terms of OEM bookings in 2021? Is there a number for that?
spk10: Yeah, so, you know, we did, depends on the OEM vendors. Some did better than the others, but the growth, the significant growth in absolute revenues did not come from there. It came from the cloud, from actually from our, you know, other channels, other indirect business. As I've mentioned in the script and in other scripts along the way, we see the OEMs contributing a lot in bringing new completely new customers to us, and this continues to be strong. Going into next year, we are trying, obviously, to accelerate with several programs the OEM revenues. Having said that, I think our own go-to-market strategies, both for the enterprise and the carriers, executed well in 2021. Got it. Okay.
spk04: If I go back, you know, earlier in earnings season, it seems like this was long ago, but, you know, one of your competitors, F5, was having issues with component availability. They were seeing a bigger shift towards, you know, hardware in their business. It sounds like from the monologue here today that you guys aren't really, you know, seeing those issues, nor the shift towards hardware. But can you talk about what you're seeing in terms of supply chain impacts?
spk10: So I think we're exposed to what everyone is seeing. Obviously, component prices are going up, supply chain, there are some challenges. But, you know, we built somewhat more inventory, and we're paying more. We're paying more for the components. We're paying more for the shipment. You see some of the impact in our gross margin, but we ensure a continuous supply of our products to our customers.
spk01: Got it. Okay. All right, fair enough. Thanks very much. I appreciate it. Thank you.
spk08: And our next question will come from Chris Reimer. We'll come from Chris Reimer with Barclays.
spk07: Please go ahead. Hi. Hi. Yeah, this is Chris on for Barclays. Thank you for taking my questions. Looking at the revenues across geographies, it delivered strong growth, AMIA North America, Well, this quarter APAC was down. Can you comment a little on some of the dynamics you're seeing, especially in APAC and then in general just across the different regions?
spk10: Yeah. So it's a high level given, you know, we're selling more and more cloud security solutions. Obviously, we grow better where the region is more aligned to cloud computing, hybrid cloud, and so on. APAC, again, obviously depends on the country, but in a general statement is a bit after Europe and North America in these trends, and we see that in our ability to generate high amount of sales from our cloud security solutions there. So we are working hard to accelerate that, and especially in specific markets that we believe there can be a a good attainment of cloud security business. But for now, the growth rate there is more challenged versus the more developed markets for cloud security.
spk07: Got it. And is there any color you can provide on the M&A pipeline? And can you expand a little on the investments you're undertaking to support growth in the business?
spk10: Yeah, absolutely. So we continue to be active in the market to search for M&A candidates. However, I must tell you that some of the pricing we're seeing on private companies are making it hard for hardware to act upon at this time. However, we have the time and the patience to find the right candidate and the right opportunity to do an M&A. Regarding the investments we're making, as I've mentioned in my notes, we're focusing on growing our security business and specifically the cloud security. So we're making investments in dedicated sales, headcount, in marketing investments towards that, as well as significant investment in the cloud infrastructure and the R&D to support future growth.
spk07: So really just all around. Yeah. Okay. That's it for me.
spk01: Thank you.
spk08: And our next question will come from Alex Henderson with Needham. Please go ahead.
spk06: Great. Great. Thank you very much. So I was wondering if you could give us a sense of your target on headcount increases in 2022.
spk10: We're targeting, give or take, 100 to 120 people during the year.
spk06: Okay. And do you have a guide towards your expected growth rate in ARR in 2022, which I know is one of the key drivers of the business? Are we looking at, say, 25% tech growth again? Yeah.
spk10: No, we're not giving specific guides for the ARR, but you should see the total ARR in recent quarters was 9%, and that's also, by the way, the guiding figure for the whole revenue growth. For cloud and subscription, we were in the, as you've mentioned, we were in the mid-20s, and we would like to keep it. Again, it requires more work from us, but that's the direction we're taking.
spk06: I see. This is a little bit more of a longer-term question, but you've shined, I don't know, 18, 20 pretty significant wins with companies that are going to be reselling your product as a service into their local economies, whether it be the deal in Poland or whether it be the one in Spain or something in Latin America. You've had a bunch of these. My sense is that those programs take a long time to roll out from the time they're announced. And so there's somewhat of a pent-up incremental revenue growth that's coming down the pipe. Can you talk about how those major wins will translate into revenues? I'm assuming that that's not much of an impact in 2022, but probably 2023, 2024, starts to be a considerable driver of your growth.
spk10: Yeah, so like you've mentioned, we think those local partners, dedicated partners are key ways for us to grow our footprint. It does require a lot of training, product management work, joint marketing with them, white labeling, and so on. We started to see the first fruits with some of them. You know, obviously not all of them will be successful, but we do see very good progress in this, what we call active channels, cloud resellers. And we started to gain the first wins, I would say, in the second half of the year. It's still not in a big number, but the signs are very good, and we are ramping our investments also in those channel sales, marketing, programs towards this go-to-market sale, which we believe is a unique opportunity for us.
spk06: So is it a 23-24 ramp in that business? Is that right?
spk10: I think it would also contribute to 2022. I would not push it as far as 2023, but there is a ramp, and we plan to sign more. So we think this type of dedicated channel is very suitable for our cloud sales.
spk06: All right. Cisco has implemented, I think, four price hikes over the last year, including one effective February 1st, which I understand to be 10%. How do the price increases at Cisco impact you, and what are you doing on price relative to the increase in supply chain costs and inflation and semiconductors and the like?
spk01: Yeah.
spk10: So, you know, Cisco price list increases obviously apply to all products, including, you know, products that they carry from us. They can implement the price hikes by themselves based on their view of the market. And regarding us, we did not increase our price list. So far, we were absorbing the costs on one end. Of course, we were looking at discount structures, but we did not implement a price increase. We're looking into that. For now, we are staying as is.
spk06: Okay, and so the price hikes from Cisco, does that impact your growth with Cisco? I mean, are you expecting that to... I'm struggling with the disconnect here between 20% plus price hikes and... big backlogs at these companies and the fact that most enterprises are increasing their IT spend in single digits. How do we think about the give and take between price hikes and decreased volume of production or orders going forward?
spk10: So I think price list is one component. There's also a question about what discounts and whether some of those customers, maybe with Cisco in this case, have an agreement not with priceless discount, but with actual price figures. So far, I did not see the 20% price hike on Cisco on our end. I know there are some plans for certain percentage points, and we will see if they maintain the same discount levels. We will see an increase from that, absolutely. But it's too soon to tell.
spk06: Just to be clear, so when Cisco takes the prices in your product, that's not passing through your prices. Therefore, do they capture that price?
spk10: No, no, no. Assuming they sell it in the same discount as before, we would see a bigger portion of that on our end. So there's certain discounts and certain thresholds and transfer prices. There's multiple parameters, but in general, Alex, to make it simple, if Cisco will sell in higher prices, we will get a bigger share.
spk01: I see. Okay. I'll see the floor. Thank you. And our next question will come from Andrew King with Collier Securities.
spk08: Please go ahead.
spk03: Hey there, thanks for taking my question. Congratulations on the good quarter. Just wanted to dive into the guide a little farther. Can you just detail out what supply chain implications you have built into your revenue guidance for this next quarter and what you have built in when you say that you're looking to grow in the 7% to 9% for FY22? The question was,
spk10: What have we built in terms of the guidance into the supply chain costs in the first quarter?
spk01: Yes, first quarter and into the full year. Yeah.
spk10: Okay, so we took slightly lower the gross margin. You saw already some of it in Q4 results. For next year, we think it might be a little bit lower lower depending if the current pricing environment would stay, which is our current assumption. So it doesn't depend only on the components. It also depends on our product mix, but our current assumption is for a slight decline in the gross margin.
spk01: Got it. Thank you.
spk03: And then can you just detail within your new customers, how many of those were emergency onboarding versus traditional sales processes?
spk01: How many of them were what? Emergency onboarding?
spk10: I don't think we had many emergency onboarding this quarter, maybe around 10. So this Q4 was not a massive quarter, I think, in terms of emergency onboarding, but we did see many, many customers coming simply because of the overall environment. We saw many customers that came after a failed attack at a block that they experienced in previous months, and now they're revamping security. So the environment is very, very active, and customers understand that there is It's not enough to say I have a security solution. You really need to make sure it will block the attack. So I think at least in the larger enterprises, this notion of really going deeper into the success of the technology in real life to block attacks, this notion is becoming more and more critical in the decision process.
spk01: Got it. Thank you. And we do have a follow-up from Alex Henderson with NETAMP.
spk08: Please go ahead.
spk01: Great, thanks.
spk06: So you've given us the guidance on the revenue of 7% to 9% for 2022. You've also said that you're going to increase investments. So if I think about the OPEX line, Should I be anticipating that that's growing at or faster than the 79%? Is that what you're implying? I mean, I think the exchange rate versus last year is still somewhat negative in the first half, but it's kind of flattened out and actually rolled a little bit so that it's not as onerous as it was in the back half of the year. So can you talk a little bit about what you're thinking in terms of OPEX growth?
spk10: It depends on multiple factors. It might be at the high end of the revenue growth, maybe a little bit higher. At this point, we are not trying, I would say, to optimize the operating margin or the cash flow of the company. We reached already $70 million per year cash flow. We are investing for growth. So that would be our prime consideration for 2022.
spk06: And given the environment around the inflation around parts, I would assume that your gross margin will remain under some pressure, therefore flat to at least down somewhat. Is that fair?
spk10: I said a slight decline, yes.
spk06: I see. Okay.
spk10: In addition to the inflation, you know, there are also significant salary hikes in the cyber market, meaning if you look on the macro, of supply chain issues, interest rates going down and therefore financial income going down, FX, salary hikes, et cetera. The macro is putting some pressure, but on the other end, our business in cloud security, the trends we're seeing, the strength in the market causing us to invest more.
spk06: Yeah, so you tacked into My next question, which was on the churn rate and the wage inflation environment and your ability to hire. If I recall, I think you were seeing a little bit of an elevated churn versus, say, the 2019 timeframe. Obviously, it's different versus the 2020 period. And you were also seeing wage inflation. But you'd also said, I thought, that you were seeing some pressure on your ability to hire, has that improved? I've heard a couple of companies say that they're seeing some improvement in hiring availability. So could you comment on those three metrics?
spk10: I would say, Alex, we're trying harder. So I don't think the market is difficult in that sense, both on the retention and the wages, but we try harder. We double down on the hiring and recruiting resources and efforts, and we are growing the headcount.
spk06: Okay, so there's no change in conditions on either sharing wage inflation or ability to hire.
spk01: Is that fair? Okay. I'll see the floor. Thanks.
spk08: And with no further questions, I would like to turn the call back to Roy Zisipel for closing remarks.
spk01: Thank you, everyone, and have a great day.
spk08: And this concludes today's conference. Thank you for your participation, and you may now disconnect.
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