Radware Ltd. — FY 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone Q4 filing; quarterly Q4 results are not separately presented in the supplied text. Financial statements are audited and prepared under U.S. GAAP.
Business context and financial performance
Radware provides cybersecurity and application-delivery products and services for enterprises, carriers and cloud providers. In 2018, revenue grew 11% to $234.4 million, driven by services and EMEA sales. The company returned to profitability after losses in 2016 and 2017.
| Metric (US$ millions, except per-share data) | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | 234.4 | 211.4 | +11% |
| Product revenue | 118.1 | 118.0 | Approximately flat |
| Service revenue | 116.3 | 93.4 | +25% |
| Gross profit / gross margin | 192.7 / 82% | 171.8 / 81% | Margin improved |
| Operating income (loss) | 7.5 | (6.7) | Returned to operating profit |
| Net income (loss) | 11.7 | (7.5) | Returned to profitability |
| Diluted earnings (loss) per share | $0.25 | ($0.17) | Improved |
| Cash provided by operations | 49.3 | 31.5 | +56% |
Cash, liquidity and capital
- Cash, cash equivalents, bank deposits and marketable securities totaled $401.1 million at year-end, up from $344.3 million in 2017. Cash and cash equivalents alone were $45.2 million.
- Working capital was $241.0 million, versus $143.1 million in 2017; total assets were $532.7 million and shareholders’ equity was $364.0 million.
- The company reported no debt. Operating cash flow was $49.3 million; investing cash outflow was $85.5 million, primarily reflecting investment in deposits and securities and $8.9 million of capital expenditures. Financing cash inflow was $16.2 million.
- Management said available cash was sufficient to fund operations and planned activities for at least the next 12 months. 2019 capital spending was expected to focus mainly on R&D testing and lab equipment, ERP modules and cloud infrastructure; no formal earnings or revenue guidance was provided.
Material changes and unusual items
- Services rose to 50% of revenue from 44% in 2017, while products were approximately flat. Management attributed service growth to renewals, new support contracts and demand from the installed base, alongside a shift toward subscription offerings.
- EMEA revenue increased 34% to $75.8 million, principally from security solution sales; Americas revenue rose 5% to $102.5 million, with greater cloud-security demand; Asia-Pacific revenue declined 1% to $56.2 million. The United States represented 35% of total revenue.
- Operating expenses increased 4% to $185.2 million. Sales and marketing expense rose 2%; R&D expense declined 2%. The prior-year comparison included $6.9 million of other income from an intellectual-property judgment against F5, collected in 2018 but recorded in 2017.
- Radware adopted ASC 606 in 2018 using the modified retrospective method. Adoption increased opening retained earnings by $7.5 million. The filing’s comparison indicates 2018 revenue would have been $234.1 million and net income $8.4 million under the prior revenue standard, versus reported revenue of $234.4 million and net income of $11.7 million. Prior-period figures were not restated.
- At year-end, deferred revenue was $127.8 million. Remaining performance obligations were approximately $222.1 million, of which the company expected to recognize about 61% in 2019.
- In March 2019, after the reporting period, Radware acquired ShieldSquare for $14.0 million. Management expected the acquisition to add operating costs in 2019.
Outlook, risks and contingencies
- Management emphasized continued investment in cloud security, subscriptions, managed services, product development and sales reach. It cautioned that subscription revenue is recognized over contract terms and that growth plans may not translate into near-term revenue or profitability.
- Key risks include intense competition; long and variable sales cycles and seasonal purchasing; execution of cloud and subscription strategies and renewal rates; cybersecurity incidents or service outages; dependence on a small number of hardware suppliers; foreign-exchange exposure; and economic or IT-spending uncertainty.
- Radware was defending against F5 patent claims in ongoing litigation and stated it could not estimate the matter’s potential financial impact. The company also reported $3.2 million of unrecognized tax benefits whose settlement timing was uncertain.
- Related-party transactions include $7.0 million of 2018 services purchased from SecurityDam, a company in the RAD-Bynet Group, and leases of certain facilities from affiliated companies. The company said pricing was not materially different from market terms.
- Israeli bank deposits were uninsured; U.S. deposits exceeded insured limits. The company did not hedge foreign-exchange exposures generally. Adoption of lease accounting in January 2019 was expected to add approximately $18.9–$23.1 million of right-of-use assets and lease liabilities.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at December 31, 2018.
Important facts for investors to verify
- How reported profitability and margins compare after considering the ASC 606 adoption effect, including the $7.5 million opening-equity adjustment.
- Whether service and subscription growth, deferred revenue and renewals continue to support revenue growth and cash generation.
- Progress and potential exposure in the F5 litigation and the resolution of uncertain tax positions.
- Integration costs, operating impact and expected benefits of the $14.0 million ShieldSquare acquisition.
- Concentration in hardware suppliers, related-party spending, investment portfolio risks and foreign-exchange sensitivity.