Radware Ltd. — FY2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide a clear set of Q4-only results. Figures below are in U.S. dollars unless stated otherwise.
Business context
Radware develops and sells application delivery and network security solutions, including application delivery controllers, web performance optimization and attack mitigation products, plus related support services. It sells primarily through distributors and resellers worldwide. Strangeloop Networks, a web performance acceleration provider, was acquired in February 2013.
Financial results and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $193.0 million | $189.2 million | Up 2% |
| Product revenue | $118.7 million | $119.3 million | Down 0.5% |
| Service revenue | $74.3 million | $69.9 million | Up 6% |
| Gross profit / margin | $156.3 million / 81% | $153.5 million / 81% | Margin broadly unchanged |
| Operating income / margin | $17.6 million / 9% | $30.9 million / 16% | Down 43% |
| Net income / diluted EPS | $18.1 million / $0.39 | $31.8 million / $0.68 | Net income down 43% |
| Operating cash flow | $30.2 million | $51.5 million | Down 41% |
- Operating expenses rose 13% to $138.7 million. R&D increased 13% to $41.0 million, sales and marketing increased 8% to $82.8 million, and general and administrative expenses increased 54% to $14.9 million.
- Gross margin held at 81%; higher product costs as a share of product sales reflected a mix shift toward higher-end platforms. Operating margin fell as expenses grew substantially faster than revenue.
- At year-end, cash, cash equivalents, bank deposits and marketable securities totaled $285.7 million, versus $274.9 million in 2012. Working capital was $113.5 million, up from $62.0 million. The company reported no debt.
- Total assets were $388.7 million and shareholders’ equity was $294.1 million. Capital expenditures were $8.7 million. Investing cash outflow was $30.0 million; financing cash outflow was $0.2 million, including $7.9 million of share repurchases.
- Annual DSO rose to 47 days from 36; management attributed the increase mainly to year-end billing patterns. Deferred revenue was $58.7 million in total, current and long-term combined.
- Income tax expense was $4.0 million; the effective tax rate rose to 18% from 11%, principally due to a greater share of income generated in the U.S. and a tax settlement adjustment.
Material changes versus FY2012
- Revenue growth slowed to 2% from 13% in 2012. Product sales edged down while service revenue grew.
- Operating income fell by $13.4 million, primarily because of increased staffing and investment, foreign-exchange effects, and $3.5 million in intellectual-property litigation costs.
- Geographically, Americas revenue increased 26% to $73.2 million; EMEA declined 7% to $53.4 million; and Asia-Pacific declined 10% to $66.4 million. The U.S. represented 28% of revenue.
- Operating cash flow fell to $30.2 million, including a $6.4 million increase in trade receivables. Strangeloop contributed $8.1 million of net acquisition cash outflow and $5.6 million of goodwill.
Outlook, risks and unusual items
- Radware gave no specific company revenue or earnings guidance. It expected 2014 operating expenses to increase, particularly in R&D and sales and marketing, and expected further G&A legal costs related to intellectual-property litigation.
- Management cited continued investment in new and enhanced products and in sales capacity. Gartner estimates cited in the filing projected 2014 growth of 7.3% for the application delivery controller market and a 0.3% decline for intrusion prevention; these are market estimates, not company guidance.
- Key risks include intense competition and pricing pressure, slower customer IT spending, dependence on distributors and key suppliers, lengthy and unpredictable sales cycles, product development and adoption risk, and foreign-exchange exposure. The company does not hedge currency or interest-rate exposures.
- Legal matters include SNMP Research and Parallel Networks intellectual-property claims, an F5 counterclaim in patent litigation initiated by Radware, and an indemnification demand related to a Strangeloop reseller. Outcomes and potential financial effects were not estimable in the filing. The SNMP complaint against Radware had been dismissed, but an amended complaint was filed; settlement discussions were ongoing.
- The Israeli Tax Authority settlement for 2004, 2005, 2006 and 2008 returns required payment of NIS 8.3 million ($2.3 million); about $0.5 million above the provision was recorded as 2013 tax expense. Assessments of 2009–2011 tax years began in 2013.
- The company repurchased 536,557 shares for $7.9 million under a $40 million authorization. It stated that it did not intend to pay cash dividends in the foreseeable future.
- Auditors issued unqualified opinions on the financial statements and internal controls. Management reported effective disclosure controls and internal control over financial reporting as of year-end.
Important facts for investors to verify
- Review the full audited statements and notes, particularly cash-flow drivers, receivables/DSO, investment portfolio composition and tax exposures.
- Track whether product revenue stabilizes and whether service growth and newer offerings translate into faster total revenue growth.
- Assess the return on higher R&D and sales-and-marketing spending, and whether operating margins recover from 2013 levels.
- Monitor the status, costs and potential outcomes of the disclosed intellectual-property cases, including any indemnification obligations.
- Verify 2014 expense trends, regional performance, foreign-exchange effects and progress in integrating Strangeloop; the filing provides no company revenue or earnings forecast.