Radware Bucks the Trend
Late yesterday, Mark Sue, an analyst with CE Unterberg Towbin, published a research note in which he predicts the company will augment its revenues about 4 percent in its first fiscal quarter, to $12.5 million.
The company seems to be on the comeback trail. Prior to the fourth quarter of 2002, Radware had five consecutive quarters of losses. But in the fourth quarter, it reported a profit of $500,000 compared to a loss of $8.3 million in the same quarter a year ago. Revenue reached $12 million in the fourth quarter, an increase of 28 percent compared with the same period last year, when revenue was $9.4 million.
Analysts expect the company to continue to outperform in its sector. Radware is considered an important player in a subset of the Ethernet switch market. It focuses almost exclusively on Layer 4-7 switches that balance traffic loads between Web servers and manage traffic in data centers. Cisco Systems Inc. (Nasdaq: CSCO), F5 Networks Inc. (Nasdaq: FFIV), Foundry Networks Inc. (Nasdaq: FDRY), and Nortel Networks Corp. (NYSE/Toronto: NT) are all competitors in this market.
In his note, Sue says Radware will likely see success in Asia/Pacific, specifically China, Japan, South Korea, and Australia. The company has increased its penetration with Asian service providers, including NTT Communications Corp. and KT Corp., as these carriers continue to build out their networks. It will also see improvements in European sales in Italy and Germany. Other potential positives for the company are its partnerships with security providers NetScreen Technologies Inc. (Nasdaq: NSCN) and SafeWeb Inc., which add security features to the switches.
In the last quarter the company reported margins of 82 percent, one of the highest levels in the sector. Cisco has been averaging just over 70 percent gross margin (see Cisco VP Gets Cool Reception). Sue expects the company to maintain these margins in the current quarter. The company attributes these high levels to the fact that customers are buying fully loaded systems with all of the available features turned on.
Another key reason that margins have remained high is because the company has been able to add hardware and software features to its products without redeveloping new ASICs, explains Stephen Kamman, an analyst with CIBC World Markets. He notes that Cisco has taken a similar approach to its Web switches and is getting similar margins on competing products. But he cautions that nothing lasts forever.
“On a long-term basis, investors shouldn’t expect these margins to stay so high,” he says. “But I don’t expect them to fall more than a few percentage points.”
Improvements in Radware’s bottom line can also be attributed to an expansion in the company’s sales force. The company has traditionally relied on sales channels and a small direct sales force. But over the past year it has beefed up its direct sales.
It's also introducing new products. Last month, the company introduced its third-generation product, the Application Switch III. This switch is equipped with a 10-Gigabit Ethernet uplink port, seven Gigabit Ethernet ports, and 16 Fast Ethernet ports. It is specifically geared toward high-end data center customers that are using Gigabit Ethernet interfaces to connect to servers.
At the end of the fourth quarter, Radware had cash and investments of $125 million, or about $7.25 per share. Currently, Radware is trading at about $9.34. Unterberg’s Sue says he expects the company to increase revenues in 2003 by about 17 percent, with yearly revenue reaching about $51 million.
“Given the company's strong product cycle, customer traction and diversity, and solid cash position, we believe the risk/reward prospects for RDWR are favorable,” writes Sue in his note. “We are maintaining our Short-Term and Long-Term Buy ratings.”
Sue and Kamman have both set the 12-month price target on the stock between $11 and $14 per share.
Like its competitor Foundry, Radware has executed well in a down market (see Foundry's Revenue: Rising Again?). But there are still risks.
Analysts point out that tech spending could still decline. And because much of the company's management and development teams are based in Tel Aviv, political uncertainty poses a threat. Lastly, Kamman points out that the company is small and has a very low market capitalization, which means that investors inherently take on a greater risk.
— Marguerite Reardon, Senior Editor, Light Reading