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spk05: Welcome to the Radware conference call discussing third quarter 2022 results, and thank you all for holding. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. As a reminder, this conference is being recorded November 2nd, 2022. I would now like to turn this call over to Yiska Edrez, Director, Investor Relations at Radware. Please go ahead.
spk00: Thank you, Denis. Good morning, everyone, and welcome to Radware's third quarter 2022 earnings conference call. Joining me today are Roy Zisapel, President and Chief Executive Officer, and Gaia Vidhan, Chief Financial Officer. A copy of today's press release and financial statement as well as the investor kit for the third quarter are available in the investor relations section of our website. During today's call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. These forward-looking statements are subject to various risks and uncertainties, and actual results could differ materially from RADWA's current forecasts and estimates. Factors that could cause or contribute to such differences include but are not limited to, impact from the COVID-19 pandemic, general business conditions, and our ability to address changes in our industry, changes in demand for products, the timing in the amount of orders, and other risks detailed from time to time in RADWAS filings. We refer you to the documents the company files and furnishes from time to time with the SEC, specifically the company's last annual report on Form 20F as filed on April 11, 2022. 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 Zisopel.
spk04: Thank you, Yiska, and thank you all for joining us today. During the last few weeks of the third quarter, we saw closing delays in some customer deals and an increase in multi-phase contracts in response to macroeconomic headwinds. These trends expanded globally and impacted our revenue, which came in below the low end of our guidance. We expect this environment to continue to impact our business in the short term. We continue to track the deals that did not close, and at this point, we are not aware that any have been lost to competition. We remain confident in our market position and competitiveness as evidenced by the continued wins we are seeing in large enterprises across all regions. We have a healthy pipeline and we see strong activity level among customers and prospects, which continue to be driven by a significant increase in cyber attacks. Given that, we're taking several measures to manage the business and leverage opportunities that will position Radwer for long-term success. First, We will continue to focus on and cater to the large enterprise market with our state-of-the-art protection. We believe the current environment and spending behavior are temporary and expect to see strong demand from large enterprises in the future. We believe there are significant opportunities in the market, even if the deals take more time to mature. For example, during the third quarter, we closed a multimillion-dollar application security deal with a Fortune 500 SaaS company. We won the deal based on our strong partnership and unique application security capabilities. Other examples of large enterprise wins include the new logo deal with a leading service provider in Latin America for our complete cloud security offering. Our frictionless approach to security was crucial to this customer in protecting their complex environment. In partnership with Cisco, we also closed another new logo deal with a major US financial services company to provide hybrid cloud DDoS protection. We displaced the incumbent who could not provide the level of visibility and protection that the customer needed. The second measure we are taking is to increase our investment in cloud security and shift resources to our cloud growth initiatives. In times of financial uncertainty, and an increased threat landscape, cloud security can help customers boost their security without committing to larger upfront CapEx investments. In response to this market need, we are constantly expanding our global footprint by opening more cloud security centers. During the third quarter, we opened two new centers in Dubai and Italy to expand our market share. For example, in the Emirates, several new customers already onboarded to the security center. One new logo from the financial sector found our Cloudidos solution critical to comply with regulations. Another new logo, which is from the media sector, moved from a private to public cloud and wanted to strengthen their application protection. The other new logo, which we won jointly with Check Point, was from the education center. but our cloud were following a demonstration of our advanced capabilities and was convinced in radio technology advantage, especially considering the local cloud center. The third step we're taking is reallocating resources to expand our footprint in the medium-sized enterprise market. The cybersecurity risks and needs of the mid-market are identical to the needs of the large enterprise market. However, the capacity and skill talent that mid-market companies have to manage their security environments are more limited. Our fully managed cloud security services are a great fit for this market, as evidenced by the significant number of medium-sized enterprises that are choosing our cloud application security offering. To leverage this opportunity, we are targeting mid-market security needs by expanding our channel relationships and offering cyber protections through a cloud-first approach. And lastly, we are taking measures to fine-tune our operational expenses to ensure our business is profitable with strong, positive cash flow from operations. This includes reallocating internal resources to focus on cloud growth initiatives and making focused investments on long-term growth opportunities that we expect will lead to better returns. As we look at the state of the cybersecurity landscape, we believe there are several market forces playing to our advantage. First, the number and level of sophistication of DDoS, WAF, and bot attacks continue to increase. Hackers are relentless. Organizations will continue to invest in protecting the critical applications and infrastructure, and we believe Radware has the right offering to ensure the best protection for them. In fact, in the third quarter, Gartner recognized Radware for its application security solution. In its critical capabilities report, Gartner once again ranked Radware the number two solution out of 14 companies for API security and DevOps use cases, as well as high security use case. According to Gartner, Radware provides a robust set of application security controls and offers one of the stronger API security offerings on the WAP market. Second, companies continue to struggle to achieve consistent high-quality application security. According to our multi-cloud application security report, 70% of respondents are not confident in their ability to apply security across on-prem and multi-cloud platforms. And 64% said that they don't trust the security offered by public cloud platforms. In short, More organizations are looking to have a dedicated application security solution in the public cloud, a need that Radul is especially suited to meet. While these are challenging and uncertain times, I'd like to reiterate that the fundamentals underlying our business are strong. Our company is healthy with a large and diversified customer base and robust balance sheet with more than $400 million on hand. We continue to generate cash from operations, build our annuity business, and invest in our cloud security footprint and capacity. Although this quarter revenue fell below expectations, we expect to end the year with a record revenue. With cyber attacks increasing in complexity and climbing in sheer volume, we believe the need for our solutions, and specifically real-time protection of applications, will remain strong. As we continue to fight for the good guys in this cyber war, we are confident that Radul is on the right track and well positioned for long-term growth. With that, I will now turn the call over to Guy.
spk03: Thank you, Roy, and good day, everyone. I'm pleased to provide the analysis of our financial results and business performance for the third quarter of 2022, as well as our outlook for the fourth quarter of 2022. 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 earning press release issued earlier today and on the investor section of our website. Third quarter 2022 revenue declined 4% year over year to $70.5 million, compared to $73.4 million in the same period of last year. As Roy noted, we saw longer sales cycles, as well as resizing in some of our large enterprise and carriers' customers, as a result of macroeconomics headwind, which affected our revenues across all regions. Revenue in the Americas in the third quarter was $32.9 million. representing 8% decrease in Q3 2022 as compared to Q3 2021. On a 12-trailing month basis, America's revenue decreased by 1%. EMEA revenue in the third quarter was $22.2 million, representing a decrease of 6% when compared to the same period of last year. On a 12-trailing month basis, EMEA revenue grew by 18%. APAC revenue increased by 10% to $15.5 million as compared to Q3 2021, and 3% increase on a trailing 12-month basis. In the third quarter, Americas accounted for 47% of total revenue, EMEA accounted for 31% of total revenue, and APAC accounted for the remaining 22% of total revenue. I'll now discuss profits and expenses. Gross margin in Q3 2022 was 82.9% compared to 82.6% in the same period in 2021. An expansion of 30 basis points. Our main gross margin improvement is related to the complete integration of security dam, partially offset by higher costs related to recently launched cloud infrastructure coupled with lower revenue. Operating expenses in the third quarter of 2022 were $53.2 million, representing an increase of 9% as compared to the same period in 2021. Increases predominantly due to additional R&D headcount focused on our cloud and HAWKS initiatives. The full impact of Security DIME integration and increase in travel costs post-COVID. To improve profitability, we are reallocating internal resources as evidenced by headcount growth this quarter of only 1% compared to the second quarter. Compared to Q2 2022, operating expenses decreased by 2%, demonstrating our ability to manage our cost structure in a responsible manner, and in accordance with the market environment. We continue to strategically look at all aspects of our business and are adjusting our cost structure as needed, while internally reallocating resources to key growth initiatives and investing in long-term programs that support our customers' needs and will lead to long-term growth. Net income in Q3 2022 was $6.7 million as compared to $11 million in Q3 2021. Radwar adjusted EBITDA for the third quarter was $7.3 million, which include the negative $2.4 million impact on adjusted EBITDA of the HOGS group. The decrease in the HOGS adjusted EBITDA is a result of increasing investment in R&D resources. Earning per share was $0.15 compared to $0.23 last year due to a low revenue in the quarter as compared to last year's revenue for the same period. Despite the decline in revenue in the third quarter, we met our earning guidance, which is a testimony of our commitment to manage our expenses and our ability to navigate the company and generate cash even during challenging times. Turning to the balance sheet and cash flow items. We generated $1.5 million in cash from operations during Q3 2022 as compared to $17.9 million during the same period of last year. Within the third quarter, we repurchased shares in the amount of approximately $6 million And we ended Q3 2022 with approximately $434 million in cash, bank deposits, and marketable securities. Our strong balance sheet provided us with great foundations to navigate in the current market conditions and volatility, while focusing on long-term opportunities to drive profitable growth. During the third quarter, the RADWR board of directors has authorized an increase of $20 million buyback of the company's ordinary shares. And as of today, the remaining approved buyback budget is $81 million. I'll conclude my remarks with guidance. RADWR is a robust company with a global team of professionals, a profitable business model based on critical cyber solutions, a strong balance sheet and loyal customer base. Moreover, RPO for the end of the third quarter grew versus the third quarter of last year, and all of which give us the confidence in the fundamentals of our business. As we said in previous call, while a challenging microenvironment posed some uncertainties on customer spending behavior, we expect cybersecurity demand to remain resilient in the long run. However, we're still witnessing protracted sell cycle and a growing preference for multi-phase deployment among larger enterprises and carriers. Therefore, we choose to take a prudent approach in the short term. We expect total revenue for the fourth quarter to be in the range of $73 to $75 million. We expect our non-GAAP operating expenses to be between $54.5 and $56 million. Given all these trends and developments reviewed earlier, we anticipate Q4 2022 non-GAAP diluted net earnings per share to be between 16 and 19 cents. I'll now turn the call over to the operator for questions. Operator, please.
spk05: At this time, I would like to remind everyone, in order to ask a question, simply press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. And your first question is from the line of George Notter with Jefferies. Please go ahead.
spk01: Hi, guys. Thanks very much. I guess one of the things that stuck out to me was the annual recurring revenue number. I'm looking at a $195 million number. I think that's flat sequentially. I assume there's some puts and takes in that number, but can you kind of talk about why that number was flat and you're not seeing growth in that area?
spk04: In the end, I would say it's an outcome of the revenues, and I would say the missing revenues translate to that ARR. In general, we see continuous growth in cloud ARR and more challenging on the product and services side. But we believe, obviously, that this result is low and should improve in coming quarters. That's also in line with our increased focus on cloud security that we believe will drive this figure upwards.
spk01: Got it. And I assume within that, I guess I assume the maintenance contracts that are inside that number that are on appliances or traditional hardware sales, is that the piece that's sort of softening and that's getting offset by cloud and product subscriptions and therefore you're getting to like a net flat sequential number? Is that the dynamic that's going on here?
spk04: That's correct. That's exact. However, with that, we believe it should grow sequentially and, of course, year over year. So that is definitely in our model, but we believe that with heightened level of revenues plus even more focus on cloud security, as we've noted in our prepared remarks, that should drive a faster growth of the cloud piece to overshadow any decline if happening on the maintenance contract.
spk01: Got it. And then can you give us a cloud services and product subscription ARR growth number? I think last quarter you told us it was 18% year-on-year. I'm just curious what that was this quarter.
spk04: It was around 12%. Got it.
spk07: Okay. I'll pass it on. Thanks, guys. Your next question is from the line of Alex Henderson with Needham.
spk05: Please go ahead.
spk06: Great, thanks. So can you just talk about, I know it seems mundane, but obviously you've got a very large cash balance and with interest rates going up, a three-point increase in interest rates would add about $8 million to your numbers once it's fully rolled through. Can you talk a little bit about How you expect the interest income line to trend? Is the 2.4 or 5 million in the third quarter the run rate? And how will it step up as interest rate benefits roll through your balance sheet?
spk03: So we expect more or less same income from interest in the coming quarter, 2.4, 2.5 million.
spk06: um per quarter we also mentioned in the prepared comment commentary that we will continue to do buyback so we will use some of the cash for buyback so just mechanically i mean interest rates have gone up a lot more than three percent and probably to go up another three quarters today uh in the us um can you talk about how that you know how you're structured against that are your Maturity is going to roll over the next three or four quarters. Do you have a little longer maturities on those investments? Just give us some sense of it.
spk03: Strategically, we're shifting to shorter maturity. We are balancing between convertible bonds and investing in just putting the money in banks for six and 12 months, which currently yields even higher. interest and bonds that actually fills in our investment policy. So we're shifting more towards short-term now.
spk06: Okay, so looking out to next year, you're not going to get a nice uptick in the interest income? Because it's a pretty big number. I mean, we're talking about, again, on-year cash and short-term investments. a three-point swing, which we've already seen, is an $8 million change. And it's not trivial. So is that not going to step up, you know, $5, $6, $7 million in 2023? No, definitely.
spk03: Next year, we expect a function in our income from interest. And obviously, it will grow as interest rate, you know, even if interest rate will stay as it is today. All right. We still have... in convertible bonds from the past.
spk07: What portion is variable? What do you mean variable? Well, you know, we'll roll over the next three to six months.
spk03: It's about, let's say about half is still based on, let's say, convertible bonds that still have lower interest rates. Okay, thank you.
spk06: Going back to the competitive landscape, it does sound like EMEA is under a lot of pressure. It's pretty clear that conditions there are going to get worse over the next couple of quarters as winter comes in and the economies continue to decelerate. So can you remind us a little bit just what your position is in terms of what portion in EMEA is local currency based and what portion is priced in dollars?
spk07: Revenue is all in dollars.
spk03: It's 100% in dollars?
spk07: Yeah, close to 100%. Okay. Okay.
spk06: And then going to the operational environment, can you talk about pipeline and to what extent there's been an erosion in the pipeline or whether that's still robust and how are we set up as we go into the next couple of quarters given the pipeline generally is three, six, nine months kind of structure?
spk04: So I would classify the pipeline as very robust, even very close to record levels, if not at that level. And it's driven also by the delays in closing some deals. So it's not only the creation that continues and depends on the region might be more challenged or less challenged, but also because of delays of closing that obviously increases the current pipeline. But overall, pipeline is robust. A lot of activity deals that we think are maturing. And as I've mentioned, we did not see competitive pressure or losses on the pipeline. So going forward, at least, trying to put aside the sales cycle or the lengthening sales cycle, we feel very good about the pipeline.
spk06: One last question, then we'll see the floor. The multi-phase deployment, how big an impact is that in How does it manifest?
spk04: I'll give you an example of an expected carrier deal that we had for mobile protection. Initially, they were talking about doing 30 mechs in one shot, around $3.5 million product deal. They ended up with saying, okay, we'll do 10 mechs first, one-third, the next year as we deploy the MEX, et cetera, we will do another one and maybe towards the end of the year or the year after, another 10. So they are, because of supply chain, budget, whatever, they are phasing their own deployments and they're phasing our orders. So in that case, a product deal that's generally a create immediate impact on revenues, of course, for us. Immediate recognition is moving from 3.5 to 1.2 million.
spk07: I see. Thank you.
spk05: Your next question is from the line of Tim Horan with Oppenheimer. Please go ahead.
spk02: Thank you. I think you said some large customers are resizing. I'm assuming they're grooming or trying to cut their expenses. Can you elaborate on that a little bit more?
spk04: Yeah, I think so. First, you know, I just gave an example of those phasing, etc. We are seeing, for example, customers that instead of taking the full cloud security solution at one shot, they're trying to stage it for cloud and then some appliances, etc. We were used to, I would say, get all of that in one piece. So it has different shapes and forms, but budget allocation, more lengthening sales and approvals cycles. All of that we see either of the whole deal pushed or some of the deal getting booked and then delayed. Now, we don't see it across the board. We see it in very large deals, the regular midsize deals or even, you know, Medium to large, we did not, maybe yet, but we did not experience that. But on the larger commits, in the very large enterprises or carriers, that's where we see this phenomenon.
spk02: Yeah, well, are you seeing existing customers? Are they maybe reducing spend on some of their, or are they trying to reduce what they're spending with you now for existing customers on either legacy products, not new customers, existing?
spk04: We see that also in large existing ones. For example, the example I gave from the carrier, it's an existing large customer of ours where the deployment towards 5G is new. But over there, we do see that phenomenon.
spk02: Gaya, so any idea how long the slowdown can last here? Can companies go two years without really investing? Is it a two-quarter phenomenon? What do you kind of expect on the timing?
spk04: So I would split it to where we are part of a new infrastructure build, and then it might be on the long side because it depends on their plans for a new data center or deploying of 5G, et cetera, et cetera. And then I would say we are aligned to their overall business environment and investment capabilities. So that's one end. On the other end, when it's serving existing infrastructure and existing business, I don't think it can be delayed too much because the hackers and the cyber activity is there. So you can delay budget, you can try to resize it or to fit more your current needs versus buying for three years ahead of time, et cetera, et cetera. But the investment you would need to make, otherwise you would be vulnerable. So I think the heightened cyber activity levels would actually accelerate budget spend in our areas. As long as it belongs to existing infrastructure, existing applications, et cetera, I think it's hard to delay too long.
spk02: And lastly, I know you haven't lost any deals, but have you seen a step up in activity on the competitive front, either from hyperscalers or any other competitors? No, no.
spk04: No, I think we're doing quite well on the competitive landscape, actually. I know it does not show in the current quarter numbers, but in general, we've seen, especially in cloud, our win ratios going up in the last three, four quarters. So we feel good about the competitive positioning. I mentioned Gartner report. We have other reports attesting to the same and very strong customer references in Gartner, Peer Insights, et cetera. On all the competitive fronts, we feel good. We do need to take the steps we've mentioned, going more cloud, strengthening the mid-market to accelerate our growth. Thank you.
spk05: At this time, there are no further questions. I will now turn the call over to Roy for any closing comments.
spk04: Thank you very much all for attending and have a great day.
spk05: This does conclude today's conference call. Thank you all for joining. You may now disconnect.
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