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Tuesday, 04/04/2006 8:12:18 AM

Tuesday, April 04, 2006 8:12:18 AM

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Radware’s scandalous warning
Why Radware is talking about management problems in the US for a fourth time, and the truth about the leak/warning.


Shlomi Cohen 4 Apr 06 13:29

This week’s profit warning by Radware (Nasdaq: RDWR; TASE: RDWR) is outrageous, and not because the company missed analysts’ sales forecasts by $2 million (it happens to everyone), but because of the fact that it was leaked. Radware is not a major company about which one could say there were rumors circulated in the market by its distributors, for example, about weaker sales and the possibility of a warning in the offing. What’s more, the stock gave no indication in recent days, neither in price of volume, that anything was wrong.
Missing an expected sales target of $22 million by $2 million, (with one of the two million already classified in the company’s financials as deferred sales), is a such trivial error that Merrill Lynch analyst Tal Liani could only release his damning forecast on Friday afternoon that sent the share tumbling in massive volume ten times Radware’s usual, thanks to a specific leak earlier that day.

I am not all sure that Liani is celebrating the fact that he was the only analyst to accurately predict the Radware news because, whatever people might think, this is an Israeli company and the analyst covering it is also Israeli. Having said this, the investors who made their exit from Radware on the strength of his forecast will no doubt sending him flowers as a token of appreciation for his tip, assuming, that is, that the stock continues its journey southwards.

In addition to the mystery as to how Liani came by the precise information on the final day of the quarter, I am at a loss to understand why Radware’s management only published its warning on Sunday night, a timing that left speculative investors in Tel Aviv trading in the stock on Sunday wondering whether or not a warning would be forthcoming following the crash in New York.

Talking of warnings and leaks, several years ago I found myself curious to learn how the internal process works from the moment managers realize the need to publish a warning, through to the board meeting and then the final decision on the date and form of the warning to be published. I asked a director at one of the companies that had published a severe profit warning several years earlier how it worked. “What process?” he replied, “On the day the warning was published, I got an email from the CEO saying how sorry he was but to avoid the risk of a leak, he had gone and published the warning and that it would be discussed at the next board meeting.” That’s what Radware should have done, rather than waiting until Sunday evening.

This is how the events unfolded, as I see it. Last Friday, one hour after the start of trade in New York someone buys 50 Put options, valid through April only, at $20 a share. He pays $55 per option ($2,750) in all, and had he wanted to realize a quick profit, he could have sold them shortly before the close of trade on Friday at more than $225 an option (netting him $11,250).

Half an hour after buying the aforementioned Put options, the price hits the critical $20 level and three hours later also the $19 level in massive turnover. This happens shortly before the publication of Liani’s comments regarding a “challenging quarter.” Some time later, the $18 level is broken with two million shares changing hands, ten times the stock’s average volume.

This is not the first time that Radware has issued a warning following which someone does the rounds, raking in profits in hundreds of percentage points on Put options. Neither it is the first and not even the second time that Radware has referred to management problems in the US. It may, however, be the fourth time that they’ve replaced the manager in question.

One frustrated investor writing in the Yahoo! chat room, said that it was time the management in Tel Aviv stepped down for a change, but the poor guy is apparently unaware of a specific problem that I have referred to when I wrote about the previous profit warning. CEO Roy Zisapel’s boss also happens to be his father, chairman Yehuda Zisapel. You try firing your own son, especially with Passover only round the corner.

The management will be providing an explanation for the recent failure in the upcoming conference call to be held following the posting of final results at the end of the month. This time, however, the excuse they used to account for the last profit warning in June 2005 won’t work. Back then they claimed that the mergers and acquisitions in their specific sector had caused confusion among customers and brought orders to a halt.

Today, the entire data communications equipment sector, including Radware’s own network-based data transmission routing sector, is booming. As a result, some of the stocks are now at their annual highs, and some have even reached highs for the first time in several years. With this in mind, it is difficult to understand what has gone wrong at Radware, regardless of the identity of the manager running the show in the US.

Published by Globes [online], Israel business news - www.globes.co.il - on April 4, 2006

http://www.globes.co.il/serveen//globes/docView.asp?did=1000079995&fid=1176

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