Radware Ltd. — FY2017 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017. Although the request refers to “2017 Q4,” this filing is an annual report and does not provide a standalone Q4 results summary. Figures are U.S. dollars unless noted; financial statements are audited under U.S. GAAP.
Business context
Radware provides cybersecurity and application-delivery products, subscriptions, cloud offerings and managed services for enterprises, carriers and cloud providers. It reported one operating segment. In January 2017, it acquired cybersecurity analytics company Seculert.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $211.4 million | $196.6 million |
| Product revenue | $118.0 million | $110.2 million |
| Service revenue | $93.4 million | $86.4 million |
| Gross profit / margin | $171.8 million / 81.2% | $160.9 million / 81.8% |
| Operating income (loss) | $(6.7) million / (3.2%) | $(12.7) million / (6.5%) |
| Net income (loss) | $(7.5) million / (3.5%); $(0.17) per diluted share | $(8.7) million / (4.4%); $(0.20) per diluted share |
| Cash from operations | $31.5 million | $38.5 million |
| Capital expenditures | $7.2 million | $9.4 million |
| Cash, deposits and marketable securities | $344.3 million | $320.1 million |
| Working capital | $140.8 million | $181.5 million |
| Total assets / shareholders’ equity | $469.1 million / $315.4 million | $430.3 million / $299.8 million |
| Debt | No debt reported | No debt reported |
Operating cash flow was positive despite the net loss, supported in part by a $28.8 million increase in deferred revenue. The investment portfolio and cash balances are substantial, but some bank deposits are uninsured. The filing reports no off-balance-sheet arrangements.
Material changes versus prior period
- Revenue rose 7.5% after falling 9% in 2016. Product revenue increased 7% and services increased 8%; management attributed part of the product increase to subscription revenue deferred from prior periods being recognized in 2017.
- Operating loss narrowed from $12.7 million to $6.7 million, and net loss narrowed from $8.7 million to $7.5 million. Gross margin declined from 81.8% to 81.2%.
- Operating expenses increased 3% to $178.4 million. Higher R&D, sales and marketing costs included Seculert-related expense, compensation increases and the stronger NIS versus the dollar. A $6.9 million F5-related award recorded as other income partly offset expenses.
- Cash from operations declined by $7.0 million. Working capital fell by $40.7 million, while total cash, deposits and marketable securities increased by $24.2 million.
- Revenue mix remained 56% products and 44% services. The Americas grew 16%; EMEA grew 5%; Asia-Pacific declined 2%. The United States represented 37% of revenue.
Outlook, commentary, risks and unusual items
- Outlook: No formal revenue or earnings guidance is provided. Management said available cash should fund operations and planned marketing, sales and R&D for at least the next 12 months. It expected 2018 capital spending mainly for R&D labs and testing, ERP modules, and cloud infrastructure.
- Business model: Management described continued movement toward subscriptions, cloud and managed services. Subscription accounting defers some revenue while expenses are incurred currently; the filing cautions that the transition may not produce revenue growth or achieve expected renewal rates.
- Tax and accounting items: The U.S. Tax Cuts and Jobs Act led to a $3.249 million fourth-quarter 2017 tax expense from remeasurement of deferred tax assets; management said the estimate could change in 2018. A 2017 Israeli tax settlement covered 2012–2014 returns, with $10.728 million paid against a $10.950 million provision and about $0.2 million recorded as additional tax benefit. For the January 2018 revenue-standard adoption, the company estimated a $0.142 million retained-earnings decrease for revenue recognition and an approximately $10.2 million increase from capitalization of eligible contract-acquisition costs; no cash-flow impact was expected.
- Acquisition: Seculert consideration was $10 million cash plus up to $10 million contingent on milestones. The contingent liability was valued at $1.55 million at year-end; the filing said an R&D milestone had not been achieved.
- Litigation: Radware recorded $6.9 million of other income for the F5 award, including interest, collected in January 2018. A separate F5 patent suit against Radware remained unresolved; management could not estimate its financial impact.
- Key risks: Continued losses; intense competition; revenue timing and seasonality; currency exposure, particularly NIS costs; reliance on a small number of hardware platform suppliers; cloud-service availability and cybersecurity risks; tax positions and regulatory change; and geopolitical risks associated with operations in Israel. The company generally does not hedge foreign-exchange exposure.
- Assurance: The auditor issued an unqualified opinion on the financial statements and internal controls over financial reporting. Management also concluded disclosure controls were effective at year-end.
Most important facts for investors to verify
- Whether revenue growth and subscription renewals continue, and how deferred revenue converts into recognized revenue and operating cash flow.
- Whether operating expenses—especially R&D and sales and marketing—can be supported by sustained growth and improved margins.
- The composition, maturity, credit quality and uninsured exposure of the $344.3 million investment pool, and the effect of interest-rate and currency movements.
- The final tax effects of U.S. tax reform, the realizability of deferred tax assets, and any further tax-authority assessments.
- Developments in the unresolved F5 litigation and whether Seculert achieves the milestones tied to contingent consideration.
- Exposure to supplier concentration, cloud-service outages, cybersecurity incidents, and the company’s related-party leases and service arrangements.