Radware Ltd. — FY 2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone 2016 Q4 filing. Financial statements are audited and prepared under U.S. GAAP; amounts below are in U.S. dollars.
Business context
Radware develops and sells cyber-security and application-delivery solutions, including DDoS protection, application delivery controllers and web application firewalls. Offerings include appliances, subscriptions and cloud services. Sales are primarily through distributors and resellers; the company reports one operating segment.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $196.6 million | $216.6 million |
| Product revenue | $110.2 million | $136.8 million |
| Service revenue | $86.4 million | $79.8 million |
| Gross profit / margin | $160.9 million / 81.8% | $178.4 million / 82.4% |
| Operating income (loss) / margin | ($12.7 million) / (6.5%) | $18.0 million / 8.3% |
| Net income (loss) / margin | ($8.7 million) / (4.4%) | $18.6 million / 8.6% |
| Net cash from operating activities | $38.5 million | $39.1 million |
| Capital expenditures | $9.4 million | $13.8 million |
| Cash, deposits and marketable securities | $320.1 million | $315.1 million |
| Working capital | $181.5 million | $101.0 million |
Radware reported no debt. Cash and cash equivalents alone were $79.6 million at year-end, versus $33.7 million a year earlier. Current assets were $266.8 million and current liabilities $85.3 million. Operating cash flow less capital expenditures was approximately $29.1 million. The company repurchased $22.0 million of shares in 2016; year-end shares outstanding fell to 43.2 million from 44.8 million.
Material changes versus prior periods
- Revenue declined 9% year over year, following a 2% decline in 2015. Product revenue fell 19% in 2016, while service revenue rose 8%.
- Management attributed lower product revenue largely to the shift toward subscription sales, which are recognized over the subscription term, as well as challenging international market conditions. The product/service mix shifted to 56%/44%, from 63%/37% in 2015.
- Gross margin was broadly stable, but product cost as a percentage of product sales increased to 24.8% from 21.3%, attributed to product mix and competition.
- Operating expenses rose 8% to $173.6 million. Sales and marketing increased 11% to $103.8 million; R&D rose 3% to $51.7 million. The company moved from operating and net profit in 2015 to losses in 2016.
- Revenue fell in each reported region: EMEA declined 14%, Asia-Pacific 11%, and the Americas 4%. The U.S. represented 35% of total revenue.
- Deferred revenue increased to $84.2 million from $71.2 million, reflecting unearned subscription and support revenue.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects 2017 sales and marketing expense to be higher than 2016, while R&D expense is expected to be at a similar level, excluding exchange-rate effects and salary increases. G&A expense is expected to rise moderately.
- Management says subscription sales may support longer-term growth and profitability but cautions that the transition can defer reported revenue and that renewal rates and execution are uncertain. The company expects cash resources to fund operations and planned activities for at least the next 12 months.
- In January 2017, after year-end, Radware acquired Seculert for $10 million cash plus contingent payments of up to $10 million. The filing states the acquisition will add operating costs.
- Radware prevailed in an earlier patent case against F5, with a stated damages award of approximately $6.9 million and a permanent injunction; appeals were pending and the award had not been recorded at year-end. Separately, F5 filed a patent suit against Radware in April 2016; the company could not estimate its potential impact.
- Unrecognized tax benefits were $13.2 million at year-end, with settlement timing unclear; Israeli tax authorities began assessing the 2012–2014 tax years. The filing notes potential material effects if tax positions are not sustained.
- Other principal risks include intense competition, dependence on a small number of hardware suppliers, execution of the global ERP rollout, cloud-service outages, foreign-exchange exposure, and geopolitical and operational risks in Israel. The company generally does not hedge currency or interest-rate exposures.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether subscription adoption and renewals are translating into durable revenue growth, and how much deferred revenue converts to recognized revenue.
- Whether expense growth—especially sales and marketing—produces improved sales and a return to operating profitability.
- The status and financial consequences of the F5 litigation and appeals, including any eventual recovery of the earlier damages award.
- The Seculert acquisition’s integration, operating costs, milestone payments and contribution to revenue or product capability.
- The recoverability and concentration risks of the $320.1 million investment portfolio, including uninsured bank deposits and exposure to interest-rate and credit changes.
- The outcome of tax audits and the potential settlement of $13.2 million in unrecognized tax benefits.