Business context and reporting period
Radware Ltd. filed this Form 20-F for the fiscal year ended December 31, 2015, not for the fourth quarter alone. The Israeli company develops and sells cybersecurity and application-delivery products and services, including DDoS protection, application delivery controllers and web application firewalls. Financial statements are in U.S. dollars and prepared under U.S. GAAP.
Financial performance and position
Amounts below are in U.S. dollars; financial statement figures are rounded to the nearest $0.1 million.
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $216.6 million | $221.9 million |
| Product revenue | $130.1 million | $139.0 million |
| Service revenue | $86.4 million | $82.9 million |
| Gross profit / margin | $178.4 million / 82.3% | $182.2 million / 82.1% |
| Operating income / margin | $18.0 million / 8.3% | $25.1 million / 11.3% |
| Net income / margin | $18.6 million / 8.6% | $25.0 million / 11.2% |
| Diluted earnings per share | $0.40 | $0.53 |
| Cash provided by operating activities | $39.1 million | $52.2 million |
Gross margin is calculated from reported revenue and gross profit; other margins are similarly calculated. Capital expenditures were $13.8 million, versus $9.5 million in 2014. Investing activities used $6.9 million, while financing activities used $43.5 million, primarily reflecting $52.9 million of share repurchases.
At year-end, cash, cash equivalents, bank deposits and marketable securities totaled $315.1 million, down from $330.7 million. Working capital was $101.0 million; total assets were $430.9 million and shareholders’ equity was $319.1 million. The company reported no debt. Current liabilities were $77.4 million, including $46.1 million of deferred revenue; long-term liabilities were $34.4 million.
Material changes versus the prior comparable period
- Revenue fell 2% after growing 15% in 2014. Product revenue declined 6%, while service revenue grew 4%.
- Management attributed most of the product-revenue decline to Radyoos’s web-browser-extension business, affected by browser and operating-system changes; the remainder reflected a shift toward subscriptions, which defers revenue recognition.
- Operating expenses rose 2% to $160.4 million. Research and development expense increased 13% to $50.0 million; general and administrative expense fell 14% to $17.0 million, partly due to lower intellectual-property litigation costs.
- Operating income declined 28% and net income declined 26%. Operating cash flow fell to $39.1 million from $52.2 million.
- Asia-Pacific revenue declined 11%; EMEA revenue rose 13%, while the Americas declined 5%. Services increased to 40% of revenue from 37%.
- The company repurchased 2.8 million shares for $52.9 million in 2015. Year-end shares outstanding were 44.8 million, compared with 46.9 million a year earlier.
Outlook, commentary, risks and unusual items
- For 2016, management expected operating expenses to increase slightly or remain unchanged overall, with higher R&D and sales-and-marketing spending; it did not provide a company revenue or earnings forecast. Management estimated taxes at up to 22% of pretax income.
- Management cited market-research estimates that the ADC sector would grow 7.4% in 2016 and the DDoS-prevention market 15%; these are industry estimates, not Radware guidance.
- Key risks include intense competition and pricing pressure, uncertain demand and long sales cycles, reliance on distributors, dependence on three manufacturing suppliers, foreign-exchange exposure without hedging, and execution risk from product, cloud and ERP investments. APAC conditions, especially in China, Japan and Australia, weighed on 2015 sales.
- Investment and liquidity risks include low interest rates and market-value fluctuations. Some bank deposits are uninsured or exceed insured limits; the company disclosed that most deposits were held at Israeli banks. It also disclosed $12.3 million of unrecognized tax benefits whose settlement timing could not be reasonably estimated.
- Legal developments after year-end: Radware reported a March 2016 $6.4 million award in its patent case against F5 Networks. F5 filed a separate patent suit in April 2016 concerning Radware ADC and WAF products; management could not estimate its effect. These are subsequent events, not 2015 operating results.
- Radware stated it did not intend to pay cash dividends in the foreseeable future. Management and the auditor reported effective internal controls, and the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether product-sales trends, subscription recognition and service growth support a recovery in total revenue and operating profitability.
- Whether R&D and sales investment yields growth sufficient to offset higher costs, and whether 2016 expense expectations were achieved.
- The progress, potential financial exposure and accounting treatment of the F5 litigation, including the reported $6.4 million award and subsequent F5 claim.
- The resolution of tax audits and the $12.3 million of unrecognized tax benefits, as well as continued eligibility for Israeli tax benefits.
- Cash deployment and investment risk, including share repurchases, uninsured bank deposits, portfolio ratings and interest-rate sensitivity.
- Supplier concentration and the effectiveness of measures to address currency exposure, as Radware disclosed that it did not hedge foreign-exchange risk.