Radware Ltd. (NASDAQ:RDWR) Q1 2024 Earnings Call Transcript May 8, 2024
Radware Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Radware Conference Call discussing First Quarter 2024 Results and thank you all for holding. At this time, 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. [Operator Instructions] As a reminder, this conference is being recorded May 8, 2024. I would now like to turn the call over to Yisca Erez, Director, Investor Relations at Radware. Please go ahead.
Yisca Erez: Thank you, operator. Good morning everyone, and welcome to Radware’s first quarter 2024 earnings conference call. Joining me today are Roy Zisapel, President and Chief Executive Officer, and Guy Avidan, Chief Financial Officer. A copy of today’s press release and the financial statements, as well as the investor kit for the first 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. The forward-looking statements are subject to various risks and uncertainties, and actual results could differ materially from Radware’s current forecast and estimate.
Factors that could cause or contribute to such differences include, but are not limited to, impact 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, the timing in the amount of orders and other risks detailed from time to time in Radware’s filing. 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 20-F as filed on March 25, 2024. We undertake no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date of such statement is made. I will now turn the call to Roy Zisapel.
Roy Zisapel: Thank you Yisca, and thank you all for joining us today. We ended the first quarter of 2024 with revenues of $65 million and non-GAAP earnings per share of $0.16, both above the high end of our guidance. We diligently managed expenses and improved our profitability. Similar to previous quarter, we witnessed a favorable business environment marked by an uptick in large CapEx deals, more customer engagement and a healthier pipeline. In the first quarter, total adjusted ARR increased 8% year-over-year, driven by growth in our cloud and subscription business. Subscription revenues now account for 46% of total revenue compared to 41% in the first quarter of last year, demonstrating our ongoing shift to SaaS model. Our cloud security business sustained robust growth with cloud ARR growing again 22% year-over-year.
This performance is also underscored by a record number of new bookings and new logos. The momentum behind our cloud security business is driven by four key growth drivers that we believe are sustainable. First, our product offering fuel strength consistently draws security conscious customers. Our cloud security offering leads with a large battery of AI powered security algorithms designed to detect and block attacks without disrupting legitimate traffic flows. Customers highly value these unique capabilities, driving numerous new logos and expansion deals. Second, the ongoing expansion of our cloud security offering creates additional cross and upsell opportunities. During the first quarter, we announced the expansion of our cloud application and network security services to include a new hardware load balancer as a service and enhanced cloud network analytics service.
These services assist organizations in optimizing application performance, ensuring availability and maximizing network monitoring and visibility during peacetime. They complement the value we provide, further strengthening our proposition to clients. Third, the steady expansion of our geographical footprint creates new customer acquisition opportunities. During the first quarter, we expanded our global cloud service network and launched a new DDoS scrubbing center in Paris. We plan to introduce additional locations later in the year. Fourth, a pivotal factor is the surge in application and network attacks, in particular, layer 7 web DDoS attacks, fueling customer demand for enhanced protection this new wave of web DDoS attacks has been motivated by major geopolitical conflicts and activists activities.
A trendset during Russia invasion of Ukraine had led to an increased frequency and sophistication of web DDoS attacks. These attacks emerged last year and intensified in the previous quarter, with expectations for further escalation in frequency, complexity and sophistication throughout 2024. The growing demand for advanced real time protection is evident in the success of our DefensePro X solution, which provides protection against web DDoS and advanced DNS attacks. DefensePro X has performed very well and been highly competitive. The AI powered offering is unmatched in its ability to automatically detect and surgically block web DDoS attacks. This result is improved security and faster time to resolution, crucial for maintaining customer business continuity.
The strength of this value proposition is evident in some of our first quarter wins. For example, we signed two major seven-digit DefensePro X deals, one with a tier one carrier in North America that upgraded their DDoS protection. The other win was with a major European financial institution that experienced a large layer seven attack. The latter also replaced their incumbent cloud DDoS provider with our hybrid cloud DDoS solution for a complete protection. Our partnership with Cisco and Check Point were another contributor to our performance in the first quarter. We kicked off 2024 with record Cisco booking following a record year in 2023. While Check Point also demonstrated a strong start for the year. To protect our customers, we constantly innovating our offering.
With AI at the fingertips of attackers, threats are becoming not only increasingly complex and adaptive, but also with reduced time to attack. In response, we’re taking a fight AI with AI approach to security. A good example for our fight AI with AI strategy is the enhancements we introduced to our bot manager. The newest addition of our bot manager is designed to automatically mitigate a new generation of aggressive, AI driven, inhuman like bots without blocking legitimate users. For our customers, this means better end user experience and a reduction in costly business impacts like customer churn and lost revenues. Another example is the AI powered Wolfray DNS DDoS protection solution. Using our patented algorithms, it automatically distinguishes between legitimate and attack traffic and instantly adapts DDoS defenses based on the specific attacker.
According to our recent threat intelligence report, DNS flood attacks increased nearly 400% between 2022 and 2023, and these new algorithms will significantly shorten time to resolution when countering even the most sophisticated DNS attacks. Our offering continued to receive recognition by industry analysts in quadrant 2024 Spark Metrics report for DDoS mitigation, Radware was named a leader for the fourth consecutive year. Radware was also named as an other leader as well as product innovation and market leader in KuppingerCole Leadership Compass report for web application firewalls. In GigaOm 2024 report for application and API security, Radware earned recognition as a fast mover and leader. In addition, we were the only vendor to earn GigaOm’s top scores for AI enhanced vulnerability detection and key bot management features.
In one quarter, we were recognized as a leader in DDoS, in web application firewall, and in API security. This is another evidence for our best of suite approach. We provide customers with an integrated suite to protect application and data center attacks. While our capabilities in each of the core pillars of DDoS, WAF, API, and bot security lead the market when evaluated as a standalone capability, our customers receive best of bid security alongside a fully integrated suite, hence best of suite. In summary, we began 2024 with a solid performance. We delivered sustained growth in cloud ARR, improved profitability, expanded market presence, and leveraged momentum with our OEMs. These results were supported by improvements in the business environment, rebounding customer spending, and heightened cyberattack.
We believe Radware has the right offering to meet the market demand for best in class security and faster response and recovery times, and we intend to capitalize on that for ongoing growth and increased profitability. With that, I will turn the call over to Guy.
Guy Avidan: Thank you Roy, and good day everyone. I’m pleased to provide the analysis of our financial results and business performance for the first quarter of 2024, as well as our outlook for the second 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 first quarter 2024 was $65.1 million, compared to $69 million in the same period of last year. Revenue was driven by cloud and subscription growth offset by product decline. As Roy highlighted, we are encouraged by the recovery sign we see in customer demand and engagement, even though customer spending is not completely back on track.
The cloud security business continued to demonstrate strength with 22% year-over-year growth in cloud ARR similar to last year, and reached $67 million in the first quarter of 2024. Cloud ARR now accounts for 32% of total ARR compared to 27% in Q1 2023. On original breakdown, revenue in the Americas in the first quarter of 2024 was $27.1 million, similar to the same period last year, and accounted for 42% of total revenue. On a twelve-month basis, America revenue decreased 15% year-over-year. EMEA revenue in the first quarter 2024 decreased 24% year-over-year to $22.7 million and accounted for 35% of total revenue. The decrease is mainly attributed to a large deal recognized in Q1 2023. On a twelve-month basis, EMEA revenue decreased 15% year-over-year.
APAC revenue in the first quarter of 2024 was $15.3 million, which represents an increase of 25% year-over-year and accounted for 23% of total revenue. On a twelve-month basis, APAC revenue increased 5% year-over-year. I’ll now discuss profits and expenses. Gross margin in Q1 2024 was 82% compared to 82.3% in the same period in 2023. Operating expenses decreased 6% year-over-year and totaled $49 million, which is at the lower end of our guidance. Operating income reached $4.3 million compared to $4.4 million in the same period of last year, and with this level of OpEx, we believe that the company is positioned to better profitability in the coming quarters. As we highlighted a couple of quarters ago, we are committed to drive efficiency and keep our cost structure aligned with the level of company’s operations.
We are confident in our ability to continue to improve our profitability and adjust expenses as necessary. Radware’s adjusted EBITDA for the first quarter was $6.2 million, or $8.9 million excluding the Hawks business, compared to $6.5 million, or $9.2 million, excluding the Hawks business in the same period of last year. Financial income was $3.8 million in the first quarter. This level of financial income is expected to continue throughout 2024. The tax rate for the first quarter of 2024 was 15.3% compared to 14.8% in the same period of last year. We expect the tax rate to remain approximately the same next quarter. Net income in the first quarter was $6.8 million as compared to $6.1 million in the same period last year. Diluted earnings per share for Q1 2024 was $0.16 compared to $0.14 in Q1 2023.
Turning to the cash flow statement and the balance sheet, cash flow from operation in Q1 2024 was $21.1 million, compared to a negative cash flow from operation of $1.2 million in the same period of last year. The improvement in cash flow from operation is derived from strong billing performance in the first quarter of 2024 and in Q4 2023 and higher net income. During the first quarter we repurchased shares in the amount of approximately $840,000 as of March 31, 2024 approximately $66 million remain in our share repurchase plan. We ended the first quarter with approximately $383 million in cash, cash equivalent bank deposit and marketable securities. I’ll conclude my remarks with guidance. We expect total revenue for the second quarter of 2024 to be in the range of $65 to $67 million.
We expect Q2 2024 non-GAAP operating expenses to be between $49 million to $50 million. We expect Q2 2024 non-GAAP diluted net earnings per share to be between $0.15 and $0.17, representing an increase of approximately 60% year-over-year at the mid end at the midpoint guidance. I’ll now return the call over to the operator for questions. Operator, please.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Alex Henderson of Needham. Your line is open.
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