Radware Ltd (RDWR 3.73%)
Q2 2021 Earnings Call
Jul 28, 2021, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to the Radware Conference Call discussing Second Quarter 2021 Results, and thank you all for holding. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session.
I would now like to turn the call over to Yisca Erez, Director, Investor Relations at Radware. Please go ahead.
Yisca Erez -- Director, Investor Relations
Thank you, Christy. Good morning, everyone, and welcome to Radware's second quarter 2021 earnings call -- conference call. Joining me today are Roy Zisapel, President and Chief Executive Officer; and Michael Goldberger, VP, Finance. A copy of today's press release and financial statements, as well as the investor kit for the second quarter are available in the Investor Relations section of our website.
During today's call, we may make projections or other forward-looking statements regarding future events or future financial performance of the Company. These forward-looking statements are subject to various risks and uncertainties, and actual results could differ materially from Radware's current forecast and estimates.
Factors that could cause or contribute to such differences include, but are not limited to, impact from the COVID-19 pandemic, general business conditions, and our ability to address changes in our industry, changes in demand for products, the timing and the amount of orders, and other risks detailed from time to time in Radware's filings.
We refer you to the documents that the Company files and it furnishes from time-to-time with the SEC, specifically the Company's last Annual Report on Form 20-F as filed on April 20, 2021. We undertake no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date of such statement is made.
I will now turn the call to Roy Zisapel.
Roy Zisapel -- President and Chief Executive Officer
Thank you, Yisca, and thank you all for joining us today. I'm excited to report strong second quarter that exceeded our expectations with record revenue and accelerated growth.
Our strong performance extended across all business lines and all geographies, including growth in large deals, record new customer business and record in new cloud logos. Our achievements demonstrate the continued expansion of our cloud and application security businesses; our ability to execute on strong demand to our solutions and our ongoing success helping our customers protect the critical applications.
Second quarter revenue was a record $70 million, representing year-over-year growth of 19% and one of the fastest growth rate we had in recent years. Cloud and subscription ARR continue to grow strongly at 27% in the second quarter, reaching another record quarter. These results are underpinned by the accelerated transformation of enterprises to digital and the increase in global cyber attacks that make it critical for our customers to ensure they have the best possible cyber security solution for their business and application.
In the second quarter the strong demand for our solutions led to solid growth in bookings and we earned some impressive wins. So why do we win? First, we are winning because of our superior technology. At the core of our technology, our sophisticated algorithms, they combine machine learning, fuzzy logic algorithms, as well as various behavioral-based detection and protection algorithms. Combined, these technologies enable our solutions to automatically adapt to the changing threat landscape and differentiate between the deep and attack traffic. That in turn position us to deliver the widest, fastest and most accurate security protection in an environment of constant attacks.
One example is a large video gaming company in Asia Pacific, which experience the complicated DDoS attack both inside and outside the country. When their existing security solution could mitigate the attack and since time was of essence to prevent the severe disruption to their customers; they turn to us for an emergency cloud DDoS solution. Shortly thereafter they expanded their solution to a hybrid cloud DDoS by placing our defense for appliances at the edge of their data centers.
Another example is a Fortune 500 company, which is one of the largest rental companies in the US. This company received the ransomware letter, which was followed immediately by a DDoS attack that exceeded their Internet capacity and brought them down. Our partner Cisco reach out to us and we mitigated the attack. Following our success the customer chose Radware hybrid cloud DDoS protection based on our unique ability to manage this right. These are just two examples that demonstrate the strength of our technology and our ability to successfully mitigate complex cyber attacks in real time.
The second reason we are winning new business is because of the breadth of the cloud security offering. Hackers are utilizing the large set of attack tools and enterprises are looking for sophisticated security solutions to protect their applications and mitigate these cyber attacks. Our broad cloud security offering provides end-to-end protection for these -- for their assets and applications. We offer fully managed, integrated web application protection both attack mitigation, API security and DDoS protection cloud service coupled with public cloud security.There are two notable cloud wins I'd like to share from the second quarter. We signed a very large cloud application security and DDoS deal with one of the largest construction equipment manufacturers in the world. This Fortune 500 company was facing challenges protecting their applications. They choose Radware because of our deep security expertise and our ability to execute and deliver Web Application Security in any form factor. In the end it became evident that Radware offered the best solution for securing several thousands of applications over many different environment.
The second major cloud win that we signed in the second quarter was with the largest service provider in Latin America. For a suite of Application Security Solutions, Web Application Security, BOT management and DDoS. The customer was severely impacted by both attacks and DDoS activity. After failing to contain the effects using rate limiting solutions, we walk the customers through the right way to approach that. We offer the best protection and prove this from day one in [Indecipherable] traffic proof-of-concept.
The third reason we are winning new business is because of our proven reputation in our ability to expand our business across our existing customer base. Our customers continue to acknowledge our industry leadership and our ability to keep their application safe and protected. For example, one of the largest e-commerce companies in the world a long time customer of our DDoS appliances added last year our cloud DDoS solution. In the second quarter, they decided to strengthen their application security by adding our BOT Manager to DDoS solution to meet the growing security [Technical Issues].
Fourth, we continue to win new business, because of our partnerships. In the last couple of years we've been working on expanding our channel relationships. We continue to invest in training and educating our partners and expect these investments to bear fruits over time. In the second quarter, we signed a deal with a large US hospital, which was looking for more visibility and reporting with the help of our partner Checkpoint, we presented the hospital our latest capabilities and upgraded their solutions.
We also [Technical Issues] a large deal with a global online fashion retailer. This retailer was planning to extend their network and move the potential increase their exposure to DDoS attacks and threaten their ability to deliver goods to their customers without disruption. We replaced these retailers incumbent solution with our hybrid cloud DDoS solution. The key success factor in closing this deal was not only the strength of our protection, but also our close relationships with Checkpoint.
In summary, the momentum in our business continues to be strong across the Board, supported by significant growth in our cloud security business. Our pipeline is robust with the accelerating pace in digital transformation and the shift to the cloud, the market provides many opportunities for us. And we are confident in our ability to execute on them.Before turning the call to Michael, I would like to take this opportunity to thank our customers and partners for their trust in us. And I would like to thank our employees for their great efforts and dedication. Michael?
Michael Goldberger -- Vice President, Finance
Thank you, Roy, and good day everyone. I'm pleased to provide the analysis of our financial results and business performance for the second quarter of 2021.
I would like to remind you that the net otherwise indicated, all financial results are longer. The conciliation between the GAAP and non-GAAP results for the quarter are detailed in our press release. Without this outstanding quarter with both the top and bottom line results far exceeding our expectations. Second quarter 2021 revenue reached a record of $70 million, representing an increase of 19% year-over-year and acceleration growth from 11% growth in the first quarter of 2021.
Total revenue was driven mainly by our application security and our cloud business. In the second quarter of 2021, cloud and subscription ARR grew 27%, compared to Q2 2020 and total ARR was $177 million, an increase of 8%, compared to the same period of last year.
Looking at geographies, we had growth across all regions. America's revenue grew 2% in Q2 2021, compared to the same period of last year and accounted for 40% of total revenue in the second quarter. EMEA and APAC we are very strong. EMEA revenue grew 36% in Q2 2021, compared to the same period of last year and accounting for 35% of total revenue. APAC revenue increased 32% in Q2 2021, and accounting for 25% of total revenue in the quarter.
I will now discuss expenses and profit. Gross margin for the second quarter of 2021 reached 82.3%, compared to 83.1% in the same period of last year. Our gross margin can fluctuate from quarter-to-quarter as a result of product and geographic mix. Operating expenses in Q2 2021 was $38.6 million, up 10% from Q2 last year. The increase is a result of higher commission, as well as travel and marketing expenses that were lower in Q2 2020, due to COVID-19. Excluding FX impacts, our reporting expenses would have been $1.4 million lower due to the weakening of the dollar versus the new Israeli shekel.
Operating income more than doubled and reached $8.8 million, demonstrating once again the good leverage in our model. The increase in operating income led to an expansion in the operating margin. In Q2 2021, operating margin expanded by 530 basis points to 12.6%, compared to 7.3% in Q2 2020. Financial income was $1.7 million, compared to $2.6 million in Q2 of last year. Similar to last quarter, and as we highlighted in previous quarters, the financial income is impacted by declining yield of marketing securities and deposit.
Tax rate for the quarter was 15.4%, compared to 13.1% in Q2 2020. The expected tax rate for 2021 is approximately 15% to 16%. Earnings diluted share for the second quarter of 2021 increased 50% to $0.19, compared to the same period last year.
Turning to the balance sheet and cash flow items. Cash flow from operations was $9 million in Q2 2021, compared to $18 million in the second quarter last year. Total cash and financial investments at the end of June 2021 were $440 million. As of the second quarter of 2021, we used $4.6 million to repurchase 163,000 of our ordinary shares. In the first half of the year, we used $35 million to buyback to -- buyback our shares and [Indecipherable] $45 million remains available under our 2021 repurchase plan.
I will turn the call back to Roy, who will provide the outlook for the third quarter.
Roy Zisapel -- President and Chief Executive Officer
Thank you, Michael. We expect Q3 total revenues to be in the range of $70 million to $72 million. We expect the continued strength of the Israeli Shekel to cause year-over-year increases in our dollar operating expenses throughout 2021. We expect our operating expenses to be between $49 million and $50 million. This operating expense level reflects an estimated $1.3 million negative impact from FX, compared to Q3 2020 rates.
With that Q3 2021 fully diluted EPS is expected to be in the range of $0.18 to $0.20. With our first half published results, the guidance we just shared for the third quarter and the continued strength we see for the second half. I would like to note that our yearly growth rate will be close to 12% year-over-year, well above our published model of 7% to 9% annual growth rate. This accelerated growth is driven by the growth in subscriptions and specifically cloud security.
I will now turn the call over to the operator for questions.
Yisca Erez -- Director, Investor Relations
Operator? Christy, can you hear me now?
Questions and Answers:
Operator
You can hear me now? [Operator Instructions] Our first question will come from the line of George Notter with Jefferies.
George Notter -- Jefferies -- Analyst
Hi, thanks very much and congratulations on the nice results here guys. I guess, I wanted to start by asking, if you guys had any supply chain impacts in the quarter? It seems like it's been a constant through earnings season in recent quarters. But I know you didn't expect to see much coming into the quarter, but just kind of following up on that, was there any impact in terms of either missed revenue opportunities or margin?
Roy Zisapel -- President and Chief Executive Officer
We had very little impact on revenue. There is obvious impact on our quarter [Phonetic], some of those component prices -- pricing has gone up significantly, especially if we would like express delivery or to get more quantities earlier. But overall impact is minimal definitely in comparison to what others are experiencing.
George Notter -- Jefferies -- Analyst
Got it, OK. And then I guess I wanted to also ask about, sort of, the gross margin in the quarter. You know, it's -- you guys are running, I think north of 83% for a lot of quarters there and now you're kind of below that threshold. I think you've been investing more in your scrubbing centers. But can you kind of talk about the gross margin performance? And what has that down a little bit year-on-year? And then how you see the outlook for the balance of the year?
Roy Zisapel -- President and Chief Executive Officer
I think overall, we say it's a mix between product and cloud security and subscriptions. Obviously, we're investing a lot in building and scaling. Our cloud security infrastructures demand is strong and that is some minor, not big negative impact on our gross margin. So, we are guiding around 82% gross margin, we think for the time being that's a conservative way to think about it. And as we scale there is an opportunity obviously to improve that.
George Notter -- Jefferies -- Analyst
Okay, thank you guys very much.
Roy Zisapel -- President and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Andrew King with Colliers Securities.
Andrew King -- Colliers Securities -- Analyst
Hi guys, thanks for taking my question. Congratulations on the good quarter. I just wanted to dive a little bit more into the growth of the ARR metric, since you've been reporting it's been slowing slightly going from 12% to 10% now 8%. Can you just give us a little bit more color into that trend?
Roy Zisapel -- President and Chief Executive Officer
Yes. It's obviously the total ARR growth rate is a balance between our device or appliances service attached, contracts and on the other hand the subscription and the cloud contracts we have. So we continue to see as I've noted very strong growth in cloud and subscription continue to be 27% and scaling every quarter. We did have a weaker service attached ARR quarter, predominantly driven by one large customer that decided -- although they refreshed our device to a next generation devices in the meantime they are staying without a valid support contract. So we see -- we saw some weakness. In the service attached contracts, however, the cloud and the subscriptions continue to drive us forward.
Andrew King -- Colliers Securities -- Analyst
Great. And then in your press releases during the quarter you guys mentioned an increase in emergency on-boarding's as a result of [Indecipherable] reemerging. Can you talk about how that balance between emergency on-boarding versus traditional sales process for this quarter? And how that differed versus historically?
Roy Zisapel -- President and Chief Executive Officer
Yes. So every time the cyber activity is going up and since the start of COVID, it's breaking, I think new records every quarter, obviously that impact the -- our sales cycles and specifically makes it more and more strategic and critical for our customers, not only to protect, but really to even upgrade their protections to what is considered best of breed or best they can afford. Every time though, you know, a customer is under attack, especially under DDoS, it means they are experiencing downtime in their business. And as everyone moving digital and moving all the assets online that's a huge business interruption and business risk.
When customers are under those ransomware or under those attacks today they cannot send it by themselves, there's just no especially a large customer that would probably experience a large attack is just no way to deal with it and then they need to approach us sometimes our competition, but more and more I think us to assist them. So, definitely there is a positive impact for that. But the impact is even bigger, because even if they're are not -- if a customer is not attacked directly by themselves they feed their peers in the industry, we see other customers and obviously the understanding of the need and criticality and budget allocation to cyber security is increasing.
Andrew King -- Colliers Securities -- Analyst
Great. And if I could just squeeze one more quick one in here. APAC really saw a nice bounce back in growth. Do you see those declining or just as a one-time bounce back this year?
Roy Zisapel -- President and Chief Executive Officer
I think, we've said, you know, in answers to several of the previous quarter about the declines in APAC, we said that bookings are looking to us good and it will eventually we've seen the -- in the P&L as well. Bookings in Q2 continued to be strong and I think those -- you're going to see, I don't know if to the extent of Q2, but you're going to see continued growth, I think in Asia Pacific.
Andrew King -- Colliers Securities -- Analyst
Great, thanks. Congrats on the great quarter.
Roy Zisapel -- President and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Tim Horan with Oppenheimer.
Tim Horan -- Oppenheimer -- Analyst
Thanks, guys. Why is the Americas growing so much slower than the rest of the world? And is there an opportunity for that to accelerate somewhat? And I just had a follow-up also on the bookings.
Roy Zisapel -- President and Chief Executive Officer
Yes. Overall, I want to say on the bookings, I know in revenues this time you see a slight -- a very slight growth rates, but overall bookings continue to be strong and especially in US enterprise. We didn't have a strong quarter in US service providers and that impact the BBA, the result we expect that to change in the second half, but US enterprise business continues to be very strong and actually lead our global business in terms of cloud business and subscription. So we're very happy with the progress we are doing in North America and the Americas in general and especially on the enterprise business.
Tim Horan -- Oppenheimer -- Analyst
Great color. And I think you said you made a tripling in new customer bookings, I guess, that's for brand new customers. Can you talk about what percentage of your growth usually comes from new customers versus existing or any other color there? Thanks.
Roy Zisapel -- President and Chief Executive Officer
Every quarter the vast majority of our business comes from existing customers. This quarter existing customers continue to do very well for us, but it was really an outstanding contribution from new logos.
Tim Horan -- Oppenheimer -- Analyst
Thank you.
Operator
Your next question comes from the line of Tavy Rosner with Barclays.
Chris Reimer -- Barclays -- Analyst
Hi, this is Chris Reimer on for Tavy. Thank you for taking my question. You talked about enterprises accelerating their digital transformation. I was wondering, if you're seeing traction for your solutions covering, public cloud infrastructures?
Roy Zisapel -- President and Chief Executive Officer
Yes, we do. So the main product we have there is the cloud native protect and that continues to grow well its customer basically at all. We're adding to that in recent quarters also our Kubernetes WAF web security product that's targeting the application infrastructure predominantly in public cloud, but also in private cloud, and together we feel we have a very strong solution to protect the data plane, the application plane and the control plane of our customers when they put in application in the public cloud. We have -- we had very nice wins, I didn't specifically talk to them in my prepared remarks on that, but also there are new -- very nice new logos that they approached -- that approached us, as well as growing with existing logos. So we definitely see more and more business specifically into the public cloud.
In general, our large enterprise and I've mentioned some of the wins like this construction company etc. Many of the workloads we serve are across the hybrid environment, winning some of them are in the legacy data centers in a bigger and bigger portion over time of them are actually residing in AWS, in Azure, in GCP and so on, and we are protecting all of them, all applications across all environment. So a lot of our customers are already migrated or are migrating or in various stages of this hybrid infrastructure, and we are providing across the board all applications, all data centers, what I believe is state-of-the-art security.
Chris Reimer -- Barclays -- Analyst
Okay. And just, is there any color you can provide on the M&A pipeline you guys often emphasized that you're disciplined when it comes to multiples. I'm just -- I'm wondering how you see the space at the moment?
Roy Zisapel -- President and Chief Executive Officer
Yes. We continue to be active in that space. The pricing of private companies does not -- I would say, does not help us to accelerate the pace of taking action, but we continue to look for opportunities.
Chris Reimer -- Barclays -- Analyst
Okay, thank you.
Operator
The next question comes from the line of Alex Henderson with Needham.
Alex Henderson -- Needham & Company -- Analyst
Hey, thank you. So first off, great quarter. Truly nice to see. But I was hoping you could give us a little bit more granularity on the portion of the quarter that came from what I would describe is the revenue stream or order stream coming from your partners in aggregate. I know you don't want to break out individual companies, I want to say here's [Phonetic] from Nokia, here's from Checkpoint or here's from Cisco, but could you give us an aggregate amount of what's happening with that, because obviously that's a very positive development for you?
Roy Zisapel -- President and Chief Executive Officer
It was solid contribution when I look on the Group in total. And specifically and I think that is also aligning well to the new customer business increase that we had, those partners brought to us significant new customers. So, I mentioned the Fortune 500 by fiscal, I think there were more than one in the quarter, I mentioned Checkpoint bringing us really Global 2000 customers. One of the example, I did not mention in my script is, I think a top five global bank that placed through our Checkpoint relationship, a multi-million dollar order for our security business, so we continue to see very strong traction in large customers through those partners, carriers, predominantly with Nokia, Enterprises, with Checkpoint and across the Board with Cisco. So I think that's a core strategic element for us, especially in recruiting new customers, and then of course adopting them and growing them.
Alex Henderson -- Needham & Company -- Analyst
So did the partnership revenue growth or should they say order growth, particularly in the cloud piece outstripped the growth of the overall company? Or is it growing at the same rate? Or is it growing less than?
Roy Zisapel -- President and Chief Executive Officer
Yes, in the cloud, I don't know, I think it's continuing to grow strongly. If I think of the major deals we've done all of them, I think the cloud and subscription [Indecipherable]. So I think they're growing -- they grow very, very well with us.
Alex Henderson -- Needham & Company -- Analyst
And if you were to look at your pipeline with those is -- is that same pipeline that you saw coming into the quarter as stronger, stronger coming out of the quarter? Has the pipeline strengthened?
Roy Zisapel -- President and Chief Executive Officer
For us that we had record quarter, meaning record amount of closings, this quarter we're starting with a stronger pipeline. So definitely new pipeline generation was very strong.
Alex Henderson -- Needham & Company -- Analyst
I assume that given your lack of constraints that you're not seeing any meaningful or a significant change in the amount of time forward that the orders are being offered in. I mean, I know, we talked to a lot of people with constraints on supplies that they've got visibility in orders out two, three quarters, I'm assuming that's not the case given the lack of constraints, is that true?
Roy Zisapel -- President and Chief Executive Officer
Yes. For us in that respect business as usual.
Alex Henderson -- Needham & Company -- Analyst
Perfect. And then on the pricing side, I assume that you're not seeing a meaningful change in pricing either given you're mostly a software company. Is that also fair?
Roy Zisapel -- President and Chief Executive Officer
Correct.
Alex Henderson -- Needham & Company -- Analyst
Perfect. And then one last question, if I could. So as I'm looking at the various partners, can you just give us a rank order of which ones were stronger and which ones were lagged, was Cisco the strongest than Nokia and then Check or some other order?
Roy Zisapel -- President and Chief Executive Officer
Yes, Alex. Thanks a lot for the question, but unfortunately I will not break at this time.
Alex Henderson -- Needham & Company -- Analyst
Okay. Thank you very much, Roy.
Roy Zisapel -- President and Chief Executive Officer
Okay. Thanks a lot.
Operator
Ladies and gentlemen, I will turn the call back over to Roy Zisapel for any closing remarks.
Roy Zisapel -- President and Chief Executive Officer
Okay, thank you all for joining us today and have a great day. Thank you.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Yisca Erez -- Director, Investor Relations
Roy Zisapel -- President and Chief Executive Officer
Michael Goldberger -- Vice President, Finance
George Notter -- Jefferies -- Analyst
Andrew King -- Colliers Securities -- Analyst
Tim Horan -- Oppenheimer -- Analyst
Chris Reimer -- Barclays -- Analyst
Alex Henderson -- Needham & Company -- Analyst