Roy Zisapel - CEO Meir Moshe - CFO.

Catharine Trebnick - Dougherty Alex Henderson - Needham Michael Kim - Imperial Capital Mike Kerlan - Wells Fargo Brian Finneran - Barclays Mark Kelleher - DA Davidson Rohit Chopra - Buckingham Ameet Prabhu - RBC.

Ladies and gentlemen, good morning, thank you for standing by. Welcome to the Radware Quarter Two 2015 Earnings Conference Call. At this time all lines are in a listen-only mode later there will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host President and CEO of Radware Mr. Roy Zisapel. Please go ahead..

Thank you. Good morning, everyone and welcome to Radware's second quarter 2015 earnings conference call. With me today is Meir Moshe, as we announced earlier this month he is stepping down and Doron Abramovitch, our new CFO.

Meir will start the call by reviewing the financial results and afterwards I'll discuss the business highlights of the second quarter results. After my comments, we'll open the discussion for Q&A.

Meir?.

Okay. Thank you, Roy, and welcome everyone to our second quarter conference call. First, I would like to review the Safe Harbor language. During the course of this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company.

We wish to caution you that such statements are just predictions and the actual events or results may differ materially, including, but are not limited to general business conditions and our ability to address changes in our industry, changes in demand for products, the timing and amount of orders and other risks, detailed from time-to-time in Radware's filings.

We refer you to the documents the company files from time-to-time with the Securities and Exchange Commission, specifically the company's last Form 20-F filed on April 27, 2015. And now ladies and gentlemen, for the financials. Revenues for the second quarter totaled to $56 million, representing 6% year-over-year growth.

Non-GAAP gross margin increased to 83.3%, the non-GAAP net income this quarter was $10.8 million or $0.23 per diluted share compared to net income of $8.2 million or $0.18 per share in the second quarter of 2014. GAAP income, $2.4 million of stock-based compensation expenses, $300,000 of amortization of intangible assets.

$1 million of litigation costs associated with IP litigation offset by exchange rate income of $100,000 bringing GAAP net income this quarter to $7.2 million or $0.15 per share compared to net income of $3.9 million or $0.08 per diluted share in the second quarter of 2014.

Non-GAAP operating expenses reached $34.4 million in the second quarter bringing our non-GAAP operating margin to 20%. The headcount for the end of this quarter was 957 employees.

In the second quarter, the company generated cash in the amount of $19 million thus our overall cash position including cash, short-term and long-term bank deposits and marketable securities amounted to $341 million and we have no debt. Shareholders' equity amounted to $344 million.

The revenue split between regions this quarter, America accounted for 43% of total sales this quarter representing 16% year-over-year growth, EMEA 28% of total sales this quarter, representing 18% year-over-year growth and APAC 29% of total sales this quarter, representing a decline of 15% year-over-year.

Revenue split between carrier and enterprise, enterprise contributed 71% of revenues and carrier 29%.

Guidance for the third quarter, we expect revenues to range between $57 million to $59 million, 83% gross margin, OpEx will range between $36.4 million to $37.2 million, financial income at $1.4 million, 14% tax rate, share count 47 million shares and non-GAAP EPS to range between to $0.23 to $0.24.

Before I turn the call over to Roy, as we announced earlier this month, I decided after more than 16 years of 64 quarters to step down. I want to say that I'm proud to have been part of the company's achievement.

I joined the company in June 1999 before its IPO when headcount was 40 employees and I leave the company when headcount is nearly 1,000 employees. Radware is strong financially and operationally and extremely exciting time in its development. I'm very confident that Radware will continue to deliver a value for shareholders and customer alike.

I would like to thank our investors and analysts for your support. It was a great opportunity to work with you during the time here at Radware. I would like to thank all Radware employees and specifically my team. Ladies and gentlemen, please join me and welcome Radware's new CFO, Doron Abramovitch. And now I would like to turn the call over to Roy..

Thank you, Meir. We had mixed results for the second quarter and revenue is coming in below our expectation. We experienced our biggest challenge in the Asia Pacific region where sales declined 15% year-over-year, conversely EMEA grew 18% and Americas grew 16% continuing to grow above market. From a vertical point of view, we saw weakness in the U.S.

carrier segment. However, we believe we're entering the second half with a strong pipeline. Therefore, we believe this is a temporary situation and anticipate nice win in this segment. During the quarter, our execution in several other aspects of our business was very strong including improved gross margin and the posting of 20% operating margin.

We continue to execute on our strategy according to the following key points. First, continue to be very focused on providing a comprehensive integrated solution for data center application delivery and security.

Second, lead innovation in the market, as it relates to data center attack mitigation, secure hybrid cloud and SDN, NFV application for secure networking. Third, increase our market footprint through traditional channels OEMs and alliances, as well as cloud and CDN channels. This first month, we announced our OEM agreement with Cisco.

The Cisco Firepower 9300, Cisco's next generation security platform include in addition to the Cisco Firewall and the Cisco IPS module, the Radware DDoS protection. This is obviously a great proof for me of the leadership we have in attack mitigation.

With the CheckPoint and now Cisco as OEM partners, it's clear that our offering is the best in the market.

The first important to know that Radware's DefensePro a data center DDoS mitigation solution is just one of the parts that are incorporated in our complete data center attack mitigation solution which includes Alteon for protecting encrypted attacks, AppWall for web application, security and division management station.

The solution is further extended with our defense pipe in vast cloud solutions to provide a complete hybrid cloud data center cyber security solution.

Therefore, we see the CheckPoint and Cisco in an agreement as an excellent opportunity to see the market with an anchor component of our attack mitigation solution and then strengthen our customer's data center protection by providing them with a complete data center and cloud AMS solution we have.

In addition, we continue to expand our go-to-market channels with additional content delivery network partners. During the quarter, we announced that Limelight Networks, a leading content delivery network is using Radware's AMS technology for Limelight DDoS Attack Interceptor.

Limelight is using our DefensePro devices across the global network to detect these attacks against their customers and leverage the Radware defense by cloud to mitigate these attacks.

With this announcement, the three largest CDM players have chosen Radware products to mitigate high volume fiber attacks another greatest phenomenon of our leadership in the DDoS protection space.

On the product front, we launched our New Device Fingerprinting Technology to mitigate malicious bot attacks, many of today's most severe security threats leverage both in other traffic sources that cannot while detection by linking user behavior and dynamically changing the source IP address they use.

With this main technology, our customers has the ability to track and use the devices based on the device and special characteristics and not based on IP address that can be changed and spoofed.

With our Device Fingerprinting Technology, Radware attack mitigation solution can precisely identify application users or website visitors where the history of malicious behavior and are often part of the Botnet. And this provides our customers with a new level of data center security.

In the second quarter, we continue to see strong bookings from our new cloud and product subscription offering.

We believe we are progressing well on creating a new revenue stream for Radware complementing and expanding our existing product and maintenance revenue stream in which we have very strong acceptance for our Cloud DDoS and Cloud WAF offerings.

While we wanted to see strong revenues this past quarter, we are very excited by the opportunities ahead of us, especially in the cyber security space. We feel great about our products pipeline and positioning. We have a problem in Asia which we are addressing but don't let that overshadow the tremendous opportunities that we have in front of us.

We provide the best attack mitigation solution in the market. We have the strongest market adoption by leading security vendors and cloud security providers and we are in the process of launching the Cisco OEM relationship, which we are very excited about.

Before concluding, I would like to thank many Meir Moshe for his exceptional partnership during his 16 years tenure with Radware. He has joined the company before the IPO and with tremendous contribution, assisted us in growing the company more than 20-fold. We wish him all the best with his next steps.

With that, I would like to open the discussion for Q&A..

[Operator Instructions] Our first question today comes from the line of Catharine Trebnick with Dougherty. Please go ahead..

Oh, hi, good morning. Thank you for taking my question. Hey Roy, could you give us more specifics on Asia? In the past, you've done very well in China and you did have the announcement during the quarter with China Railways so I -- it seems like there seems to be parts of China that are working and may be other parts of Asia that aren't.

Could you give us a little bit more details? Thank you..

Thanks a lot Catharine. This quarter the issue was not specific to China. We did successful several quarters in – from declining trends in China, but this time the issues that we experienced is more Asia Pacific wide including other country.

So I would not – it's not an issue that the China business did not perform, it actually performed better than the average of the region..

Okay. Thanks.

Competitively, how are you doing in Asia Pac against A10 and F5? I know A10 has been focusing very much on smaller VARs in North America to push their solution, were there are any competitive issues that you lost to?.

As far as we can tell, I think F5 published not so strong results in Asia Pacific. And I don't think it was competitive issue. And having said that I think we need to fix our execution and we are addressing that.

So make no mistake, we are going to make some adjustment to our Asia Pacific operation because as you can see from our Americas and EMEA performance not only this last quarter but consistently over several quarters we definitely see the opportunity for strong growth and there is no reason in our mind that Asia Pacific will turn that..

All right. Thank you. I'll step out of the queue and then jump back in later. Appreciate it..

Thank you..

And our next will come from the line of Alex Henderson with Needham. Please go ahead..

Yes, thanks. Could you give us some sense of, if we strip out the Asia side of it, what the relative growth in the U.S.

and Europe or outside non-Asian markets what the security growth look like versus the ADC growth look like in those two geographies? So we can get some sense of what the base line is excluding the disruption from Asia?.

We are not breaking the ADC and security Alex. But you should assume that security was growing above the numbers I'm going to give you shortly and ADC below.

So Americas grew 16% and EMEA grew 18% and the average growth rate if you take them together 16% to 17% around 17% and as I said security, the fastest grower and ADC is the slower grower than these numbers..

So given the significant challenge in APAC how should we view the timeline to resolve that issue, how much do you think is a function of your execution versus how much of the challenge over there is a function of weakness in China, weakness in Asia as a result of the weakness in China spilling out into economic activity and causing cautiousness in capital spending in other projects.

How do we view what's Radware controllable versus what's non-Radware controllable?.

Well, definitely seems that the overall conditions in Asia did not have that this quarter. But given our size, the [fabless] [ph] sales were doing barely millions of dollars versus what we believe is the opportunity. I don't think, it's meaningless for us to look at the market conditions.

It's all about our execution, we're demonstrating it in EMEA, we demonstrated in the Americas in the past several years even before there is a full recovery of the economy. So we're definitely looking on our sales – we can – we needing every regions to grow double-digit and Asia Pacific is a great market.

We've been very strong there in the past and we should get back to the way we executed..

Is that a two or three quarter phenomenon then?.

It's not. Generally to six and to just reorganize something around that hopefully. In the past some cases, we were able to do it maybe a bit shorter but I would say that's a reasonable assumption..

Okay. Thanks..

Our next question today comes from the line of Michael Kim with Imperial Capital. Please go ahead..

Hi, good afternoon.

Can you guys talk a little bit about the Cisco OEM partnership for the Firepower 9300 appliance and the opportunities that you see in the [brand] [ph] market and how we should think about that pace of that expansion over time?.

Okay. So as I've mentioned, we're extremely excited about this agreement. The way we see it the new Firepower 9300 and that product is an evolution is the next generation security platform for Cisco.

As the Cisco CEO is pointing security is a major focus area for them and therefore, we believe that's going to be a very big push of this product line to the market.

We believe that our module that is the only one Cisco module in this platform is basically the Cisco ASA Firewall, the Cisco Sourcefire IPS and the Radware DDoS that those are the components of the next generation Cisco platform. With things together, they are delivering the very unique security offering to the market.

And therefore, and I'm speaking beyond the service provider market, we believe that if Cisco is going to push it the way they are claiming to, it's going to be a very fast adoption of the platform, a very broad set of channels that are going to be stand behind it. And as a result we have very high expectation for what that can mean for Radware.

And top of that by Cisco placing the Radware DDoS component as a service provider than a key enterprise account. This has some very big impact for the rest of our attack mitigation solution component. Since all of our components are not separate product but are fully integrated solution.

Our web application firewall, our DefensePro unit, our defense by Cloud, our WAF Cloud are all signaling between themselves information about the factor, information about application baseline, information about filters and fingerprint that they found to bring security to a whole new level beyond specific or I will say isolated security devices around the network.

Therefore by CheckPoint and Cisco putting those or seeding those enterprise account with our denial of service protection that's a very, very good result for us to go and surge a complete attack mitigation solution.

So we're seeing -- what we're looking for revenue stream directly from Cisco given the offering that they bring, the coverage of the market and on top of that our ability to re-leverage it and create very, very strong security business in all those customers and service providers..

Great.

And then can you provide also enough data in your other partnership with Cisco for ACI, I think last quarter you talked about somewhere about 28 proof of concepts, any company and some of those customers are migrating to ACI and if you seen maybe an up tick in activity with some of the larger customers?.

We're seeing still a lot of proof of concept activity. There is more and more customers to that. I don't think its exploding I think 30, 40 of them right now also with our discussions with Cisco, we understand many of their customers are in the field at this stage. But we are definitely seeing some very large customers that are starting to testing.

And with that not only that we are able to sell both our ADC and security, there is a lot of automation, orchestration faster integration that's part of it that makes our offering extremely strategic. So we continue to work with that. We've done a joint webnair with Cisco and to all the ACI product experts across the world.

We have over 115 attendees in that. So we continue to work together with Cisco about the ACI opportunity..

Okay. Great. Thank you very much..

Our next question today comes from the line of Jess Lubert with Wells Fargo. Please go ahead..

Hey, guys, this is Mike Kerlan on for Jess. Hey Roy and Meir best of luck in the future. Just a couple of housekeeping items and then two questions.

So first off, how much of a benefit the OpEx in Q2?.

The financial has almost meaningless contribution this quarter. It was around $50,000..

Okay.

And then just secondly, can you reiterate what the OpEx guidance was for Q3 and what assumptions regarding FX are baked in?.

The OpEx for Q3 that will range between $36.4 million to $37.2 million..

Okay. And FX, is it roughly stable versus Q2..

Yes. This is mainly adding headcount continue to invest in the marketing and sales teams that you were adding constantly all over the world..

Okay. And then just as far as the U.S. carrier market, I think it's been mixed across kind of equivalent phase lately. Can you kind of talk a little bit about your pipeline with the large U.S.

carriers and the conversations you've been having and what gives you confidence that it will see improvement in the second half of this year?.

Okay. So in general, the first half not only last quarter, but also the first quarter were quite weak for us in the U.S. carriers. And other than international carriers did businesses pretty well. In the U.S.

carriers, we continue to have several programs both around application delivery and a lot of problems around security and even we feel much more confident is that we are involved in several purchasing processes already. But, we don't know whether the timeline will be Q3, Q4 but definitely for this year's budget.

So the reason we are quite optimistic is that most deals that we are still in competition on with new product and now its budgeting and purchasing processes..

Okay. And then just last one, just as far as the competitive landscape in the ADC market, it seems like may be there is some opportunity with disruption around Citrix NetScaler and Zeus recently have installed Brocade and you've got the Cisco ACEs and it's going in the way finally at the end of Q3.

Can you just talk about the dynamics of what you're seeing from a competitive aspect there and is this real opportunity for you?.

In the second quarter we didn't see much of a change. We didn't see a lot of little bit before it. I think they were quite small, even when Brocade said that their numbers are strong 2 million a quarter I think. So actually this transaction we didn't see a lot of impact from it.

I think the key point that might impact to some extent the dynamics in the ADC market is what will happen with the Citrix NetScaler division, are they going to sell ADC, there is going to be a lot of disruption around it et cetera. But in general, we didn't see any change in the competitive dynamic not in ADC and by the way not in security..

Okay. Thanks..

And next we'll go to the line of Ittai Kidron with Oppenheimer. Please go ahead..

Hey guys. This is Michael on for Ittai on. Thanks for taking my question. I just want to ask you in terms of the outlook, you guys, you sighted strong bookings in the could subscription, you said you thought, you had a strong pipeline for the U.S.

carriers and yet the revenue outlook for the third quarter was kind of a little bit soft in what we're looking for, is that primarily an APAC issue or are there other issues we should think about?.

First, overall was from services given our Q2 results.

Second, the cloud subscription booking is very strong, but we are recognizing its pro rata over the period of the contract, so its current impact on Q3 versus what we've recognized in Q2 is obviously not as big although its big enough its annuity revenue stream, which is growing I think would start to play bigger and bigger role in our revenue.

Regarding the U.S. carriers, we are not confident that the timing of these orders will be Q3 or Q4 and as a result we again being conservative with the guidance we provided.

So all in all, we think the pipeline is very strong, we think our wins and positioning is very strong and in the short-term, we are applying some conservatism to our guidance to illustrate..

Okay. And then on the cloud subscription offering, we've been hearing for several quarters about that strong bookings and that how that's doing well, I think last quarter's record bookings.

Are you ever going to provide us with some kind of metric whether it's just bookings growth or some kind of a quantitative metric that we could get our hands around and track?.

We are evaluating it seriously. I think that might be an interesting metric to share. But we need some track records with the bookings, most of those services as you recall started this year.

We want to -- be clearly that we have the right trends and that its growing and continues to grow as we look for it and then we will probably share some information about it..

Okay. I'll pass it on. Thanks guys..

Our next question today comes from the line of Joseph Wolf with Barclays. Please go ahead..

Hey, guys. This is Brian Finneran on for Joe. First, I just wanted to say good luck to Meir and thanks for the help that you provided for Joe and I.

I guess can we -- with Doron coming in as a new CFO, can we have some commentary on kind of the cash management story and is it going to stay the same or are you guys going to be still very conservative on M&A, or could we see you guys become potentially a little more aggressive on the M&A front going forward?.

Okay. So probably me that needs the testing. So I don't think our policies are outpacing personal. Our personalities reason, but it's more strategic view of the business that we and the Board come together to that conclusion.

Having said that and we said it many times on the call, we are looking for acquisition to grow our – beyond the organic growth also inorganically our business that's our statement. We are looking obviously to use our cash to finance this acquisition. At the same time we are doing detailed analysis of the possible targets of the impact on our P&L.

And as we said, we are going to -- we're looking for new business impact from this acquisition. Together with, I would say a more strategic or large business acquisitions there might be some small technology OEM acquisitions that we'll do here and there. We've done one of this with the Strangeloop acquisition two years ago.

And there might be similar acquisition in the future, but those, the effect I would say on our cash position would be far more limited as we look for strategic value from these technology buys.

So we're looking in both technology tracking as well as large business acquisitions and we're definitely looking to utilize our cash to accelerate the growth of the company and to leverage the position we have in the markets we're playing and strengthen that..

Great. That's helpful.

And then can I just -- can you just provide any color on what you're seeing on the size of deals -- there are lack of large deals in the quarter kind of way on results at all and what's the pipeline look like as we think about third quarter and fourth quarter going forward?.

Going forward we have very good pipeline also lot of units. In Q2, we saw bit less of the large multi-million deals, but I will not read too much to it already in the month of July we booked a couple of deals. So we feel good in the last year.

We feel good about our ability to land major accounts both expansions as well as new account and I don't see a problem there..

All right. Thanks a lot..

And next we'll go to the line of Mark Kelleher with DA Davidson. Please go ahead..

Thanks. Thanks for taking the questions. Most of mine have been answered. But just as a follow-up on the uses of cash from the last question.

Did you buy any stock back in the quarter?.

This quarter we haven't bought any shares back, but we have $40 million planned for 12 months and would probably will be more active in buying back shares this quarter,..

Okay. Great, that's all I have. Thanks..

And we have a question from the line of Rohit Chopra with Buckingham. Please go ahead..

Thanks very much. Roy, can you be very specific about the changes you're actually instituting in the APAC region to try to change the trajectory there, are there people that you're changing out, or you adding more people VARs et cetera. So if you could be specific there, that's my first question.

And then I had a couple on the Cisco OEM, if you don't mind.

Number one, how do you ensure that there is no channel conflict now with you, CheckPoint and now Cisco as they offer a DDoS solution and they will eventually move down the stream, so now you have three people sort of offering your solution, so how to you manage channel conflict there? And then may be some specifics on how revenue is recognized?.

Okay. So first of all, regarding the specifics about what we're planning to do in Asia Pacific. I will not go into that a little bit. I don't think it's the right time, but basically what we're doing is we're doing. We're going to copy what we've done in the Americas, EMEA and was successful in both sectors to Asia Pacific.

So before we said that we were -- we think what we've done in Americas to EMEA, I think we're seeing good results there.

So there is a lot of things the way we are organizing our field activity and that we've changed in these two sectors and we are going to bring the same structure now to Asia Pacific with some local adjustments, but overall the same strategy and we want to see it working.

Regarding the Cisco OEM channel conflict, it's true that now both the Radware sales force and channel, the CheckPoint channel and Cisco will push the Radware offering. By the way, there are also other channels like large cloud DDoS providers, large carriers that are pushing the Radware solution as well.

I think the – but there are differences between all those channels. For example the CheckPoint OEM is -- Checkpoint white labeling our existing appliances. Hardware and software have CheckPoint DDoS product. So basically, it's one to one our product line.

The Cisco OEM is not a DDoS or attack mitigation device, what Cisco is selling is next generation security platform, which includes firewall IPS and DDoS. It's not DDoS only. In that regard, it does not compete on the sale and opportunity that we and CheckPoint are currently going after.

In addition, what we are selling to Cisco is not an appliance, but a software; software capability of our solution that's been integrated into the Cisco product line.

So as a matter of fact we're not seeing here a channel conflict, if at all, we're seeing opportunity to penetrate the physical channel with our complete offer that can interact with the physical module on the Firepower 9300.

Regarding your third question of revenue recognition, we are selling new software and with maintenance and all the regular revenue recognition rule on selling software and maintenance contract supply here and there is going to be probably a sign shift obviously roughly one quarter between when Cisco sales and when we get the information recognized, but that's the -- I will say the only difference between that and regular software sale by Radware..

Thanks Roy. And congratulations Meir..

Thank you..

[Operator Instructions] And we will go to the line of Ameet Prabhu with RBC. Please go ahead..

Yes. Thank you. Just a quick clarification on the service provider side.

You mentioned deals being recognized in potentially in 3Q and 4Q, is there any concern that they could potentially slip into 1Q of next year?.

Yes. It might be, what I answered on the U.S. service providers that I want to make it clear is not that we've received the orders and now you told me about revenue recognition we're in the purchasing process.

So this designing of when they're just getting the deal and the signing of when we came recognize [indiscernible] and that's why we applied what I'd mentioned a conservative measure on Q3..

Okay. That's helpful. And just to clarify also on the cloud offering bookings and I think you mentioned 100% year-over-year growth last quarter.

Are we in that same ballpark? Any number in terms of bookings that you could share?.

I think it continues to be very, very stronger growth and I don't have the exact percentages in front of me, but we're definitely looking for the full year to be not only last quarter, but for the full year to be a very, very meaningful percentage growth probably around 100..

Okay. That's helpful.

And finally, just the growth is being driven by the spurt in the security revenue side, how are we thinking about the security investments, is there a plan to sort of double down on security organically especially considering buy and build consideration, I know you sort of talked about being a bit more mindful on valuations -- considering the valuations for security assets are out there, do we expect a doubling down on the investments organically?.

We already invested this year and I think we shared it in previous calls. We've already invested considerably in the R&D portion of security growing with very, very substantial a lot of the additional head count that went into R&D went into security.

Also in the field we've added specific resources in sales marketing business development or that's obviously we feel good [indiscernible] we're going to [put more] [ph] focus. And having said that we believe also the ADC is a growth business. And we are investing in sales head count also targeted in that, targeted in carrier et cetera.

So we're seeing opportunities of course definitely fiber security is a very, very tough test for us, but we do see opportunities also and ADCs and we are going to put more field resources as Meir mentioned and as evident by our OpEx guidance already from the coming quarter to support that..

Okay. Thank you and all the best..

Thank you..

And Mr. Zisapel, there are no further questions at this time..

Okay. Thank you very much everyone for attending and have a great day..

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using the AT&T Executive Teleconference. You may now disconnect..