Radware Ltd. — FY 2012 Form 20-F
Business context and period. This is an audited annual report for the fiscal year ended December 31, 2012, prepared under U.S. GAAP; it is not a standalone fourth-quarter report. Radware develops and sells application delivery and network security solutions. Sales are primarily through distributors and resellers. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Key financial results
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $189.2 | $167.0 | +13% |
| Gross profit / margin | $153.5 / 81.1% | $133.7 / 80.0% | Margin +1.1 percentage points |
| Operating income / margin | $30.9 / 16.3% | $18.4 / 11.0% | Income +68% |
| Net income / margin | $31.8 / 16.8% | $21.3 / 12.8% | Income +49% |
| Diluted EPS | $1.36 | $0.93 | +46% |
| Net cash from operating activities | $51.5 | $42.0 | +$9.5 |
| Capital expenditures | $9.3 | $5.7 | +$3.6 |
- Product revenue was $119.3 million, up 15%; services revenue was $69.9 million, up 10%. Product and service mix was approximately 63% and 37%, respectively.
- Operating expenses rose 6% to $122.5 million, slower than revenue growth. Sales and marketing increased 10% to $76.6 million; R&D was essentially flat at $36.2 million.
- Financial income, net, increased to $4.8 million from $4.2 million. Income tax expense rose to $4.0 million from $1.3 million; the company attributed the increase mainly to higher pretax income and utilization of Israeli tax losses.
- At year-end, cash, cash equivalents, short- and long-term bank deposits, and marketable securities totaled $274.9 million, versus $219.1 million a year earlier. Working capital was $56.6 million, down from $89.1 million; total assets were $357.7 million and shareholders’ equity $271.2 million.
- The company reported no debt. It stated that working capital was sufficient and cash resources were expected to fund operations and projected investment for at least the next 12 months. Net cash used in investing was $59.9 million, primarily reflecting purchases of deposits, securities and property and equipment.
Material changes and management commentary
- Management attributed growth to demand associated with cloud computing and virtualization, mobile data growth, application security needs, and product development. Americas revenue rose 33%; Asia-Pacific rose 12%; EMEA declined slightly, which management linked to weaker regional IT spending.
- Gross margin improved, with management citing a greater contribution from virtualized products, which generally carry higher margins than hardware products.
- Management expected 2013 operating expenses to increase, particularly in R&D and sales and marketing, as the company invested in products and market growth. Gartner estimates cited in the filing projected 2013 growth of 6.4% for the Application Delivery Controller market and 3.7% for the Intrusion Prevention market; these are market estimates, not company revenue guidance.
- In February 2013, Radware acquired Strangeloop Networks for approximately $8.4 million cash, with up to $6.0 million additional contingent consideration tied to milestones. The acquisition is subsequent to FY 2012 and its results were to be consolidated from February 7, 2013.
- The company announced a two-for-one forward share split in March 2013, expected to take effect April 12, 2013. Reported historical share and per-share amounts do not reflect the split.
Risks, contingencies and unusual items
- Israeli tax disputes remain pending in court for tax years 2004, 2005, 2006 and 2008. The ITA assessments total approximately $17.5 million, including interest as assessed; the company said an adverse outcome could materially affect results and financial condition. Separately, unrecognized tax benefits were $5.7 million at year-end, with settlement timing uncertain.
- An SNMP Research lawsuit alleges intellectual-property infringement and related claims tied to technology allegedly acquired with Nortel’s application delivery business. Damages were not specified; Radware said it found no SNMP software in the acquired materials and could not estimate the case’s financial impact.
- BB&T’s third-party indemnification complaint was voluntarily dismissed in March 2013 under a tolling agreement pending resolution of the underlying patent case.
- Available-for-sale securities generated $3.7 million of after-tax unrealized gains in other comprehensive income in 2012; no other-than-temporary impairment was recorded. Investment values and income remain exposed to interest rates, credit conditions and market volatility.
- Key operating risks include intense competition, limited backlog and long sales cycles, reliance on distributors, dependence on a concentrated supplier base (Nexcom supplied approximately 77% of products purchased in 2012), foreign-exchange exposure without hedging, and macroeconomic and geopolitical risks. Deposits in Israeli banks are not insured, and U.S. deposits exceed insured limits.
- The company does not intend to pay cash dividends in the foreseeable future. It also disclosed related-party leases and services involving the RAD-Bynet Group, including facilities leased from companies owned by the Zisapel family.
Important facts for investors to verify
- Confirm the annual, rather than Q4-only, basis of the reported results; the filing text does not provide a clear standalone Q4 income statement.
- Review the audited financial statements and cash-flow details, including the decline in working capital despite growth in total liquid investments.
- Assess the sustainability of profitability, including the impact of Israeli tax benefits and the pending tax assessments on reported and future effective tax rates.
- Track Strangeloop integration, contingent consideration, and the expected increase in 2013 operating expenses against revenue growth.
- Monitor investment-portfolio credit and interest-rate exposure, supplier concentration, currency movements, and outcomes of the disclosed litigation.