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spk00: 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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. 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. Please go ahead.
spk01: Good morning, everyone, and welcome to Radware's second quarter 2023 Earnings Conference Call. Joining me today are President and Chief Executive Officer, and Gaya Vidhan, Chief Financial Officer. A copy of today's press release and financial statements for the second quarter are available in the investor relations section of our website. During today's call, we may make projections of the forward-looking statements regarding future events and performance of the company. These forward-looking statements are subject to various risks and uncertainties, and actual results could differ materially from other 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-19 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 rather than filing. 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. We undertake no commitment to revise or update any forward-looking statement in order to reflect events or circumstances where the date of such statement is made. I will now turn the call to Roy Zisopel.
spk02: Thank you, Yiska, and thank you all for joining us today. We ended the second quarter of 2023 with revenues of $65.6 million and non-GAAP earnings per share of $0.10. Total ARR growth accelerated to $208 million compared to a 5% growth recorded in the first quarter of 2023. Our cloud security business had another strong quarter. Cloud ARR growth accelerated to 23%, reaching $59 million 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. The growing cloud business and the growth in our product subscriptions are gradually forming a sustainable and durable SaaS business model. 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 second quarter of last year. While the cloud security business produced strong results in the second quarter, the appliance cloud encountered strong headwinds, which we believe is a temporary pullback. The spending patterns of large customers have impacted CapEx purchases. Over the last few weeks of the second quarter, we witnessed increased delays in closing large on-prem deals globally, primarily among large enterprises and carriers.
spk03: To the best of our knowledge, we have not lost competitors.
spk02: We have to be prudent in our responses. To that end, we have proactively taken steps to optimize and align our cost and maintain stronger profitability. We reduce sales and marketing expense and reallocate spend towards growth markets in our cloud delivery and go-to-market efforts. Guy will elaborate more on this in his remarks. While large enterprise service providers consider their investments more carefully, strengthening cyber defenses remain a business priority. Organizations around the world are experiencing a dramatic increase in the complexity and sophistication of cyber attacks. In the first half of 2023, 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. 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, services, 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 Web DDoS service is based on two years of AI algorithm and has uniquely positioned us to combat this emerging generation of aggressive Layer 7 attacks, which are leaving companies vulnerable. Our behavioral-based solution attacks by two 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 and excellent proven results in dozens of customers, market differentiator that will set the ground for future DDoS cloud and appliance growth for our business. In the second quarter, we are to our bot manager, which are part of the 360-degree cloud application protection. The advanced solution prevents bots from bypassing traditional security controls to gain unlawful access to native Android and iOS mobile applications. It offers first-to-market integrated authentication for both iOS and Android devices and new identity algorithms allowing organizations to defend themselves against bot attacks with the highest accuracy and performance. Our investment in cloud innovation continues to pay off. I would like to share with you a few examples of the deals that 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 one 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. 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 provided DDoS, the customer recovered under our emergency. 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 one carrier and managed security service provider in Asia Pacific. Recent and government organizations impacted the provider's ability to protect some of its customers properly and exposed the weakness in the incumbent solution ability to mitigate this new wave of attacks. Our leaders in DDoS mitigation and proven expertise in these verticals position us as the go-to vendor to replace the incumbent and pave the way to a strategic reseller partnership agreement. Going forward, we intend to continue our 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, our expectation 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, and 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 position us very well to achieve our long-term targets. With that, I will now turn the call over to Guy.
spk04: Thank you, Roy, and good day, everyone. I'm pleased to provide the analysis of our financial results and business performance for the second quarter of 2023, as well as our outlook for the third quarter 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 and non-GAAP basis is issued earlier today and on the investor section of our website. Revenue for 2023 was $65.6 million compared to $75.1 million in the same period of last year. As Roy noted, 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 of the second quarter. We believe that some of the 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 second quarter of 2023 grew 23 year-over-year to 59 million dollars compared to 48 million dollars at the end of the second of the end of the 2022. cloud arr accounted for 28 percent of total arr compared to 25 percent last year the growth of our cloud business in our recurring revenue, which increased 7% year-over-year, and now accounts for 79% of total revenue compared to 65% in Q2 2022. Increase in recurring revenues, despite the headwinds we are witnessing, to more resilient subscription-based business model. Original breakdown revenues in the Americas, in the second quarter of 2023 was $27 million, representing a 10%... On a trailing 12-month basis, America's revenue decreased by 6%. EMAIL revenue in the second quarter was $23 million compared to $30 million 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 products in the quarter, predominantly to carriers and large enterprises. Finally, APAC revenue in the second quarter was $16 million, which represents an increase of 3% year over year. On a trailing 12-month basis, APAC revenue was flat. Americas accounted for 41% of total revenue in the second quarter. EMEA accounted for 34% of total revenue, and APAC accounted for the remaining 25% of total revenue in the second quarter.
spk03: I'll now discuss profits and expenses.
spk04: Cross-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. Decline in revenue. Operating expenses in the second quarter were $52 million at the lower end of guidance, representing compared to the same period in 2022. Financial income continues to grow and reach 3.4 million dollars in the second quarter as a result of higher interest rates in the market. Net income in the second quarter was 4.5 as compared to 8.1 million in the same period last year. Radware's adjusted EBITDA for the second quarter was $4.1 million, which includes 2.5% of the negative impact of the Hawks business. The alluded earning per share for Q2 2023 was $0.10 compared to $0.18 in Q2 2023. Turning to the cash flow statement and the balance sheet. operating activities in Q2 2023 was $4.9 million compared to $32 million in the same period of last year. The lower cash flow from operation is attributed to the lower net income in Q2 2023 compared to Q2 2022 in the third revenue in Q2 2023 relative to the large increase in the third revenue in Q2 2022. During the second quarter, we repurchased shares in the amount of approximately $19.7 million out of the $100 million share repurchase plan that we have in place. As of 2023, $35 million remained in our share repurchase plan. We ended the with approximately cash equivalent short-term bank and marketable security. I'll conclude my remarks with guidance. Although the macroeconomics headwinds are temporary, the timing and intensity. During this time, RADWR 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 reduce our expenses with the changing market conditions and will enable us to continue to grow. We are committed to improving profitability over time. We will continue for the third quarter of 2023 to be in the range of $61 to $64 million. We expect Q3 2023 non-GAAP operating expenses to be between $51 and $52.5 million. Resource and headcount reduction, we expect our OPEX to decrease to approximately $50 million exiting 2023. We expect non-GAAP diluted net earning per share to be between $6 and 10 cents in the third quarter of 2023. I'll now turn the call over to the operator for questions.
spk00: Thank you. At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll take our first question from George Nader at Jefferies.
spk06: Hi, guys. Thanks very much. I guess I wanted to ask about the change in the sales incentive plans. I know that you guys made some changes coming into the year. I know you tilted the plan more away from appliances and towards the cloud business, 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 changed the dynamics for you in the marketplace or Is this something that's been building over time? Thanks.
spk02: Yeah. So first, regarding the compensation plan, we did move the compensation plan. And I'm sure it has some impact. I don't think that's the major one in this regard. It's obvious that our Salesforce is and more cloud-based sales like we wanted it to be. I don't think customers, that would change the dynamic. It might be more towards the new customers. Our decline came existing customers . So I don't think 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 a guidance that we thought took into account the environment and the challenge. And as we've mentioned, the main difficulties we've experienced were in existing customers where we felt we have good understanding of the environment, process, et cetera. 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, etc. We try to take, of course, when we build 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 customers.
spk03: Great. Thank you.
spk00: And we'll move next to Tim Horan at Oppenheimer.
spk07: Hi. This is Grant Paws on the line for Tim Horan. Yeah, 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 this year and really going into 2024.
spk03: Okay. So first, the real-time mitigation.
spk02: Detection and mitigation. On one end, 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, both API security. That has been for years our competitive advantage. Prepared remarks for WebDDoS, we believe we're in competitive advantages using algorithms. 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. 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 optimized and 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 attacks, 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 is increasing significantly. Taking those two parameters into account together, I believe the barrier to entry mitigating real-time attacks is getting higher and higher. you would need to have years of investment in those algorithms, understanding of the attack tools, et cetera, to be able to do it. And therefore, competitively, although on one end you can say the challenge is getting higher, the defense needs to invest more, all of that is true, but competitively I think it's actually a good phenomenon for our organization.
spk07: Gotcha. Thanks. And just as one quick follow-up, you know, just looking at ARR, specifically the non-cloud portion of ARR, it looks like it's kind of fluctuated around that $145 million range. So, you know, I'm just curious, as customers move to the cloud, you know, what kind of uplift are you guys seeing in ARR? You know, so for every dollar of, like, non-cloud ARR, what kind of conversion is that, you know, to the cloud? Or is that not the right way to think about it? Thanks.
spk02: I think there are three buckets in our ARR. One is the cloud that has accelerated. Second is product subscriptions. Our software that we sell as a subscription is also growing and has grown nicely in the last quarter. And maintenance of appliances that is more tied to the install base and so on. You know, definitely we're 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 applying sales, namely the hybrid DDoS. In most of our business, for example, ADC, and DDoS on-prem, those have no relation to the cloud business. It's not cannibalizing, nor it's supporting today the sale of ADC. 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 several of such modules to create stronger ties between the two. But today we're enjoying cloud growth that is unrelated, basically, to the product era.
spk03: Great, thanks.
spk00: We'll take our next question from Tavi Rosner at Barclays.
spk05: 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 revenues dynamics that we've seen. And I also noticed that the decline in EMEA was a bit steeper than the rest of the geography. So I just wanted to get some colors on both of these points, please.
spk02: I'll take the OEM. We actually continue to see good traction with . We've mentioned in the analyst data that Cisco Cloud DDoS solution into the 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.
spk04: Hi, Tavi. And regarding your question about EMEA, so comparing to last year, we had 3%. um one extraordinary deal in the second quarter of uh of 22. uh that's one the second thing as we mentioned uh offered to macro headwinds owned large enterprise and and some of them work all in all we believe our business is okay thanks for that engine just looking at um
spk05: capital allocation, given your significant cash position, have you considered changing the pace in terms of buybacks and any other considerations there?
spk04: So, as mentioned, we're running on a $100 million plan. We still have, as of June 30, $35 million. Obviously, you know, prices, share prices changes and as The pace of repurchase will change as well.
spk05: Great. Thanks for taking my questions.
spk00: And we have no further questions at this time. I'll turn the call back to Roy Zisipel for closing remarks.
spk03: Thank you, everyone, and have a great day.
spk00: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
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