Radware Ltd. — FY 2011 Form 20-F
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone fourth-quarter filing; the supplied text does not provide clear Q4-only financial results. Financial statements are prepared under U.S. GAAP and audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global.
Business context and financial performance
Radware develops and sells application delivery and network security products and related support services for enterprises and carriers. Sales are primarily through distributors and resellers. The company reported one operating segment.
| Metric | FY 2011 | FY 2010 | Change / context |
|---|---|---|---|
| Revenue | $167.0 million | $144.1 million | Up 16% |
| Product revenue | $103.3 million | $89.4 million | Up 16%; 62% of revenue |
| Service revenue | $63.7 million | $54.8 million | Up 16%; 38% of revenue |
| Gross profit / margin | $133.7 million / 80% | $114.9 million / 80% | Margin broadly stable |
| Operating income / margin | $18.4 million / 11% | $8.5 million / 6% | Profit more than doubled |
| Net income / margin | $21.3 million / 13% | $9.6 million / 6% | Basic EPS $1.02; diluted EPS $0.93 |
| Net cash from operations | $42.0 million | $41.0 million | Up modestly |
Operating expenses increased 8% to $115.2 million, slower than revenue growth. R&D rose 14% to $36.1 million and sales and marketing rose 8% to $69.5 million; general and administrative expense fell 6% to $9.6 million. Management attributed improved operating results to higher sales, slightly better gross margins, and expense growth below revenue growth.
Liquidity, cash flow, and debt
At year-end, cash, cash equivalents, short-term and long-term bank deposits, and marketable securities totaled approximately $219.1 million, compared with $178.8 million in 2010. Working capital was $96.0 million, total assets $295.6 million, and shareholders’ equity $219.3 million. The company reported no debt and said working capital was sufficient for current requirements and cash resources adequate for at least the next 12 months.
FY 2011 investing cash outflow was $49.2 million, mainly for deposits, marketable securities, and property and equipment; capital expenditures were $5.8 million. Financing cash inflow was $9.3 million, mainly from employee option exercises and stock purchases. Cash and cash equivalents alone were $17.4 million; the larger liquidity total includes deposits and securities. Days sales outstanding averaged 33 days quarterly and was 27 days on an annual basis, versus 35 and 42 days, respectively, in 2010.
Material changes and unusual items
- Revenue grew 16% in 2011, following 32% growth in 2010. EMEA revenue increased 30%; Americas increased 8% and Asia-Pacific 11%.
- Financial income rose to $4.2 million from $2.1 million, reflecting higher average cash balances and foreign-exchange effects.
- Adoption of new multiple-deliverable revenue guidance from January 1, 2011 increased reported FY 2011 revenue by $5.3 million. The change was applied prospectively to qualifying new or materially modified arrangements.
- Unrealized losses on available-for-sale securities were $2.3 million at year-end; no other-than-temporary impairment was recorded. Goodwill impairment testing also resulted in no charge.
- The board authorized a share repurchase program of up to $20 million, expiring October 2012; no shares had been repurchased by the filing date.
Outlook, commentary, and risks
Management cited cloud computing, virtualization, mobile data growth, and demand for application security as market drivers. It planned to increase 2012 investment in product development and enhancement and expected operating expenses to rise, particularly in R&D and sales and marketing. The filing gives no company-specific revenue or earnings guidance. Management discussed analyst estimates of 2012 market growth, which are not Radware guidance.
- Market and execution: Economic weakness, especially in Europe, lower IT spending, competition, pricing pressure, long sales cycles, limited backlog, and failure of new products to gain acceptance could weaken results. The company reported an immaterial revenue decline from Japan during 2011 following the earthquake and tsunami.
- Currency and investments: The company does not hedge currency or interest-rate exposure. Shekel strength can raise Israeli costs; investment income and securities values are exposed to low rates, market volatility, and credit risk.
- Supply chain: Nexcom supplied approximately 72% of products in 2011; the company relies on a small group of manufacturers and planned to shift purchases away from Sanmina toward Emerson in 2012.
- Tax assessments: Israeli tax authority orders for 2004, 2005, 2006, and 2008 sought approximately $17.3 million in additional taxes, including interest as assessed. Appeals were pending; an adverse outcome could require payment of some or all of the amounts.
- Legal claim: SNMP Research alleged intellectual-property infringement and related claims concerning technology allegedly embedded in the acquired Nortel/Alteon business. Damages were unspecified, the matter was preliminary, and the company could not estimate potential impact.
- Other exposures: Political and security conditions in Israel, military reserve service, government R&D and tax-benefit conditions, related-party leases, and concentration of ownership are disclosed risks. The company does not intend to pay cash dividends in the foreseeable future.
Important facts for investors to verify
- Review the audited financial statements and notes, particularly the $5.3 million revenue-recognition adoption impact and its effect on comparability.
- Track the outcomes and potential financial exposure of the Israeli tax appeals and the SNMP Research litigation.
- Assess the composition, credit quality, maturities, and unrealized losses in the $219.1 million liquidity and investment portfolio.
- Monitor whether planned 2012 expense increases and product investments translate into revenue growth and sustained profitability.
- Confirm the supply transition and dependence on Nexcom, and consider the company’s unhedged currency exposure.