Radware Turns In Solid Quarter

Summary

• Radware reported $54.5 million revenue, up 11% year over year, coupled with record deferred revenue of $148 million, up 15% year over year.
• From a geographic perspective, APAC was the only sore spot with recorded revenues down 5%. Yet Radware disclosed it won a large and highly competitive deal with an Asian government organization.
• Given 60% of Radware’s revenue is now driven by subscriptions and deferred revenue continues to grow, the company should be able to continue to grow 10%+ in the quarters ahead.

Radware (NASDAQ:RDWR) is an Israeli cyber security and application delivery solutions vendor for physical, cloud, and software-defined data centers. The company is a sister company to other RAD Group companies I follow, including Silicom (SILC) and RADCOM (RDCM), which I believe are well-managed enterprises with significant insider ownership from brothers Zohar and Yehuda Zisapel.

Speaking to the execution, Radware has largely completed a business model pivot to selling its security solutions via SaaS subscriptions which has resulted in a higher quality revenue stream and visibility. In addition, the company appears to be innovating and is winning highly contested bake-offs, evidenced by a $7 million deal with an APAC government military organization which CEO Roy Zisapel characterized as highly competitive. Mr. Zisapel suggested Radware won the deal based on an integrated product offering - a comprehensive solution - and a compelling value proposition for the buildout of a next generation network that required a high degree of availability, quality of service, adaptability, and security.

In terms of comprehensive solutions, Radware disclosed that it released two new security products: an Active Attackers Feed and a Cloud Malware Protection product. Both products are aimed at attack mitigation which is a growing trend of proactive rather than reactive security solutions. While management didn’t address the total addressable market for both of these products specifically, Mr. Zisapel did intimate that Radware is claiming a larger wallet share of its existing customer base in addition to adding new customers. Anecdotally, I expect to hear some more downbeat news from NETSCOUT (NTCT) tomorrow regarding its cybersecurity unit Arbor Networks (a Radware competitor), which appears be losing market share based on earnings commentary from management and a reduction in revenue guidance.

All told, Radware appears to be firing on all cylinders the last several quarters, and it should be able to exceed expectations for 2018 revenue growth of 8-10% after a strong start to the year. Management and the Board appear to share the same conviction and declared a $40 million share buyback authorization, which should account for about 4% of the share count at current prices. The company remains well-capitalized with $358 million cash while generating $37 million in operating cash flow over the trailing 12 months. To that end, there isn’t any liquidity or balance sheet risk here.

Given the ongoing momentum that Radware appears to be enjoying, evidenced by its record deferred revenue of $148 million (up 15% year over year), and the fact it is levered to secular growth markets, I still believe Radware can accelerate growth to 12-15% and earn somewhere around 70 cents EPS in 2019. Putting a reasonable 30x multiple on that earnings stream and adding $8 per share in cash bring my valuation to roughly $29 per share. This equates to about 3.5x enterprise value to my estimated 2019 revenue, which seems quite reasonable as well.

For my investment taste, I’d prefer the company had less cash and fewer shares outstanding such that the operating model contained even more EPS leverage to drive shares higher. That said, I’d rather have a clean balance sheet flush with cash rather than a flimsy financial position in order to capture and scale more deals. In my opinion, Radware isn’t a perfect investment opportunity (is there ever one?), but it does appear to be safe with nice growth prospects.

Analyst’s Disclosure: I am/we are long RDCM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.