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spk05: Welcome to the Radware conference call discussing fourth quarter and full year 2023 results, and thank you all for holding. As a reminder, this conference is being recorded February 7th, 2024. I would now like to turn this call over to Yiska Erez, Director, Investor Relations at Radware. Please go ahead.
spk00: Thank you, Ian. Good morning, everyone, and welcome to Radware's fourth quarter and full year 2023 earnings conference call. Joining me today are Roy Zissa, President and Chief Executive Officer, and Gaya Vidhan, Chief Financial Officer. A copy of today's press release and financial statement, as well as the investor kit for the fourth quarter 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. These forward-looking statements are subject to various risks and uncertainties, and actual results could differ materially from Redwood'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-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 risk details from time to time in RADWIS 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 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.
spk03: Thank you, Yizka, and thank you all for joining us today. We ended the fourth quarter of 2023 with revenue of $65 million and non-GAAP diluted earnings per share of 13 cents. In the fourth quarter of 2023, total adjusted ARR, as discussed in our last earning call, grew to $211 million, 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 million. Subscription revenue that is comprised of cloud and product subscriptions accounted for 44% of total revenue in the fourth quarter, as well as for the full year, reaching $115 million for 2023. 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 fourth quarter. 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 in moving existing projects forward. Second, 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. Organizations, regardless of geography or industry, are facing increased cyber threats driven by major geopolitical tensions and conflicts. This plays directly to our value proposition, real-time protection against application and data center attacks. Third, 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're continuously enhancing our offering with new algorithms and capabilities. One example is the Web DDoS attacks. These Layer 7 attacks emerged last year and 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 fourth quarter, we announced an on-premise version of our Web DDoS protection with Defense Pro X. This solution offers companies comprehensive protection against these attacks without decrypting, enthralling traffic, or adding latency. We believe this significant capability will strengthen the traction for defense projects in the market, boosting our appliance business. 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 farms, and more. The fourth 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. 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. 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 you some of the notable deals that we closed in the fourth quarter of 2023. For example, with positive momentum beginning to return behind large CapEx deals, we expanded our long-term relationship with one of the top five carriers in the world. In a multimillion-dollar deal, the customer has extended the DDoS protection for its data center. We also closed the multi-million 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 fourth quarter, replacing two 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. 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 the success we have capitalizing on our full portfolio. In summary, we closed 2023 on a positive note. During the fourth quarter, 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 a service company. 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.
spk02: 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 2023. as well as our outlook for the first quarter 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 fourth quarter 2023 was $65 million compared to $74.1 million in the same period of last year. Revenue for the full year 2023 was $261.3 million compared to $293.4 million 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 fourth quarter, the cloud security business, which is the growth engine of the company, continued to excel, producing cloud ARR growth of 22.5% year over year, reaching $64.9 million compared to $53 million, taking us another step towards becoming a cloud security as a service company. Our security business portion accounts for the large majority of total business or fraud work. On a regional breakdown, revenue in the Americas in the fourth quarter of 2023 was $24.6 million, compared to $31.9 million in the same period last year, representing 23% decrease year over year. Revenue in the Americas for the full year of 2023 declined 70% year over year, to $103.4 million compared to $123.9 million in the same period last year. EMEA revenue in the fourth quarter of 2023 increased 2% year-over-year to $24.9 million. EMEA revenue for the full year 2023 was $96.5 million compared to $104.2 million in 2022. a 7% decline year-over-year. APAC revenue in the fourth quarter of 2023 was $15.5 million, which represents a decrease of 13% year-over-year. For the full year of 2023, APAC revenue decreased by 6% compared to 2022 to $61.4 million. For the fourth quarter 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 the decline in revenue. 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 quarter and to align the level of the company operation, we continue to reduce our operating expenses in the fourth quarter to below $50 million. 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 $3.8 million in the fourth quarter as a result of higher interest rates in the market. Tax rates for the fourth quarter and full year of 2023 was 24.3% and 17.7% respectively, compared to 12.5% and 14.1% in the same period of last year. The increase in our tax rate for the fourth quarter of 2023 is primarily due to a catch-up related to end-of-year updated estimates. The increase in our tax rate for 2023 was primarily due to lower pre-tax income for this period and expenses derived from our foreign subsidiaries which are subject to tax based on cost and not profits. Net income in the fourth quarter was $5.5 million compared to $7.7 million in the same period last year. Net income in the full year of 2023 was $18.9 million compared to $31.3 million in 2022. Radware's adjusted EBITDA for the fourth quarter was $5.4 million, which includes a negative EBITDA of $2.7 million from the Hawks business. Adjusted EBITDA for the full year of 2023 was $17.6 million, which includes $10.8 million negative EBITDA from the Hawks business. Diluted earnings per share for Q4 2023 was 13 cents compared to 17 cents in Q4 2022 and 43 cents for the full year of 2023 compared with 68 cents for the same period of last year. Turning to the cash flow statement and balance sheet. Cash flow from operation in Q4 2023 was $2.7 million compared to $9.6 million in the same period of last year. Cash flow from operation in the full year of 2023 was negative $3.5 million compared to positive cash flow from operation of $32.1 million in 2022. The lower cash flow from operation arise from a lower profitability discussed above. During the fourth quarter and the full year of 2023, we repurchased shares in the amount of approximately $10 million and $60 million, respectively. As of December 31, 2023, approximately $66 million remained in our share repurchase plan. We ended the fourth quarter with approximately $364 million in cash, cash equivalent bank deposit and marketable securities. I'll conclude my remarks with guidance. We expect total revenue for the first quarter of 2024 to be in the range of $62 to $64 million. We expect Q1 2024 non-GAAP operating expenses to be in between $49 to $50.5 million. We expect Q1 2024 non-GAAP diluted net earnings per share to be between 12 and 14 cents. I'll now turn the call over to the operator for questions. Operator, please.
spk05: Thank you. At this time, as a reminder, please press star followed by the number 1 on your telephone keypad if you would like to ask a question. Once again, that is star followed by the number 1. We'll pause a moment to compile the Q&A roster. Our first question comes from the line of Alex Henderson with Needham. Your line is open.
spk04: Great, thanks. 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 are 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?
spk02: 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 there 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 per quarter.
spk04: Great. And just any guidance on the percentage tax rate that we should be thinking for the year?
spk02: The way we see for 2024, 15% tax rate will be visible.
spk04: 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, you know, What the pipeline looks like? Is there an increase in large deals? 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?
spk03: Okay, so several points on that. So first, we started to see some first large deals closing in Q4. If you look on Q3 or Q2, we had challenges on closing those over million dollar deals. Second, 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. 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
spk04: and 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 so just to to be clear what you're saying there is that the deal closure time had been expanding uh it took longer to close the deal and now you're starting to see that improve is that what i'm hearing
spk03: Yes, and before it's not even expanding. They were not closing. They were just, you know, 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 2024. So definitely we're seeing good signs there. By the way, you couple that with the growth that we had during all recent years, including in cloud security, which we believe we can maintain that momentum. So overall, we obviously feel better. And last but not least, Guy mentioned that our RPO is now at record level. ARR is at record level. Obviously, all of that gives us more visibility towards 2024.
spk04: 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 to 55 range for all four quarters? Is that kind of the cost structure for the year? Yes. Thanks. Perfect. Thank you. Thanks, Alex.
spk05: Once again, as a reminder, if you'd like to ask a question, please press star followed by the number one. Our next question comes from the line of Chris Raymer with Barclays. Your line is open.
spk01: 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 could 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.
spk03: 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, you know, 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.
spk01: 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?
spk03: Yeah. So Skyhawk is focused on a 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 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. I think the solution is very advanced and unique in the market. You know, we are adding there 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 hardware revenues. As you see, we do consolidate the losses, although the company is fully funded. And that hurts our EPS. 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 Skyhawk. And we look forward to their success.
spk01: Great. Thanks. That's nice color. That's it for me.
spk05: Thank you. There are no further questions at this time. I would like to hand the call back over to Roy Zisipel for some closing remarks.
spk03: Thanks a lot. Thank you for joining us and have a great day.
spk05: This concludes today's conference call.
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