Anat Earon-Heilborn - VP, Investor Relations Doron Abramovitch - CFO Roy Zisapel - CEO.

Jess Lubert - Wells Fargo Securities Joseph Wolf - Barclays Mark Kelleher - DA Davidson & Company Rohit Chopra - Buckingham Research Catharine Trebnick - Dougherty & Company.

Hello, and welcome. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the Radware Q3 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions].

I would now like to turn the call over to Anat Earon-Heilborn, Investor Relations..

Thank you, Carol. Good morning, everyone, and welcome to Radware's Third Quarter 2016 Earnings Conference Call. Joining me today are Roy Zisapel, President and Chief Executive Officer; and Doron Abramovitch, Chief Financial Officer.

A copy of today's press release and financial statements, as well as the investor kit for the third quarter, are available on the Investor Relations section of our Web site. During today's 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 these statements are just predictions, and we undertake no obligation to update those predictions.

Actual events or results may differ materially, including but not limited to, 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 the Company files from time to time with the SEC, specifically the Company's last Form 20-F filed on April 21, 2016. Please note that management will participate in Wells Fargo Tech, Media & Telecom Conference next week, in Imperial Security Conference in December, and in Needham Growth Conference in January.

All three conferences are in New York. With that, I will turn the call to Doron Abramovitch..

Good morning, everyone, and thank you for joining us on the call today. I will begin with providing an analysis of our financial results and business performance for the third quarter of 2016, and then move on to our outlook for the fourth quarter.

Q3 revenue was $46.9 million, in line with the announcement we made on October 10th, and down $1 million from Q3 last year. Looking at the geographic breakdown, revenue from the Americas was $20 million, representing 43% of total revenues, and up 4.6% from Q3 2015.

Revenue from EMEA were $12.2 million, representing 26% of the total, and down 5.1% from last year. Revenues from APAC were $14.7 million, representing 31% of total third quarter revenue, and down 8.8% from Q3 last year.

Revenue from the enterprise vertical were $33.3 million, and contributed 71% of total revenue, whereas carrier revenues were $13.6, representing 29% of the total.

As we have discussed in our preliminary announcement, our business is undergoing a shift towards an increased proportion of subscription and services sales, which lead to lower than expected recognized revenue, despite double digit growth in bookings and book to bill ratio significantly larger than 1.

This bookings growth is reflected in our total deferred revenue balance, which grew 21% from $85 million at the end of September 2015 to $110 million at the end of September 2016.

Let me remind you that we calculate total deferred revenue by adding to the deferred revenue balance [at the end] balance sheet to uncollected billed amounts that were offset against trade receivables and are not presented on the balance sheet. These figures are presented in the investor kit which you can find on our website.

I would like to provide you some more details on top of deferred revenues in order to highlight the significant [growth]. I'll start with the duration of the total deferred revenues. The average duration at September 2016 balance was 1.77 years, compared to 1.75 years at September 2015.

What this means is that the 29% year-on-year growth reflects strong business activity with only a small increase in the length of the contracts. The [indication] of this duration is that consistently 60% to 65% of the total deferred revenue balance is scheduled to be recognized as revenue in the next 12 months following the balance sheet date.

So, as of September 2016, approximately $68 million was scheduled to be recognized as revenue in the coming 12 months, compared to $55 million as of September 2015. I will now move on to discuss expenses and profit, [in non-GAAP terms].

The difference between the GAAP and non-GAAP results for the quarter come primarily from stock-based compensation expenses, as well as from litigation costs, and amortization of intangible assets and exchange rate fluctuations related to the balance sheet items.

For a detailed GAAP to non-GAAP reconciliation, please refer to the financial tables accompanying our press release, or to the investor kit posted on our website. Non-GAAP gross margin was 82.4% in Q3 2016, compared to 82.9% in Q3 last year, and in line with our expectations.

Our operating expenses were $38.6 million, compared with $36.7 million Q3 last year, as we continue to invest in our business in order to ensure we have the required resources to support our [growth stream].

Non-GAAP net income this quarter was $1.6 million or $0.04 per share diluted, compared with net income of $4.8 million or $0.10 per share diluted in Q3 of last year. The weighted average number of shares used for calculating diluted net earnings per share for the third quarter was approximately 44.1 million shares.

As of September 2016, we had approximately $311 million in cash and financial investments.

During the third quarter, we were [prohibited] from conducting any stock buybacks due to the [indiscernible] the group administrative issued were both up at the end of the quarter, and we spent $8.1 million on [repurchasing] approximately 626,000 of our own shares during the [period].

We also have $26.9 million remaining on our $40 million share repurchase plan. We ended the quarter with 976 employees. We believe we have the right [indiscernible] to put the business in its [indiscernible], and to continue innovating new solutions and bringing them to the market.

Moving on to our outlook for the fourth quarter, we expect revenues to be between $50 million and $51 million. Non-GAAP gross margin is expected to be between 82% and 83%. Non-GAAP operating expenses are expected to be between $40 million and $41 million.

We expect non-GAAP effective tax rate to be 16%, and non-GAAP EPS is expected to be between $0.03 and $0.06 per share diluted. Furthermore, we expect book-to-bill ratio to be significantly larger one in Q4, and our total deferred revenue balance at December to increase from last year. I will now turn the call over to Roy..

Thank you, Doron. And good morning, everyone. As we've discussed, amongst other things, the shift of our business towards more subscription and service sales accelerated during the third quarter. While the shift reflects a desire for business transition in our business model, reflecting more than expected revenues for the quarter.

We believe that the strength in the subscription and cloud business model meets our customer [indiscernible], and at the same point creates a consistent and profitable revenue stream for Radware. We therefore intend to continue our focus on investments in this area.

I would like to spend a few minutes elaborating on the strategy underlying this transition.

Looking at enterprise customers, who increasingly prefer to buy fully-managed solutions that are consumed on a subscription basis, such as public cloud solutions, content delivery network, device cloud scrubbing, employee 24/7 monitoring and management capabilities.

This preference is a result of several technological and operational reasons that are related to the shift to the cloud from a few interlinked sub factors. First, [indiscernible] applications to the cloud affect the entire infrastructure, and requires broader protection that encompasses the enterprise itself, as well as its cloud-based applications.

Second, protection should match the access protected. So when the applications are in the cloud and not in the subscription model, buying security services subscription is now in line with that consumption model.

Third, enterprise customers increasingly need fully-managed solutions, as they lack the expertise and the resources to manage their security solutions effectively in house. The ability to provide such management services in the cloud we think [indiscernible].

Last, when our solutions are deployed, both on prem and in the cloud, the level of security we can deliver is [indiscernible]. The clear trend of migrating enterprise applications to the cloud makes our solution critical. Not only to such enterprise customers, but also to hosting companies and software as a service companies.

The cloud and hosting companies provide cloud services over a shared infrastructure. With an attack on one of their customers [indiscernible] might affect thousands of others. It is critical to such hosting companies to protect their own infrastructure as part of the service they provide.

For example, in the first quarter, we booked a 7-digit deal with a leading North American hosting service provider. The key reason for the win was our mitigation capacity being highest in the market, with over 350 gig capacity.

The needs of the customer for 100 Gbps 80 Gbps, and 30 Gbps connectivity, and above all, our state-of-the-art security algorithm to automatically detect and block any attack based on our behavioral algorithm. It is the only vendor in the market that is able to adhere to these requirements with a clear winning partner for us.

Software companies who deliver the products in a SaaS model, and similarly to those of us who provide it, the customers all the consumer the product through the shared infrastructure, and an attack on one customer can bring down the entire [Indiscernible].

For each of three types of customers, enterprise, cloud infrastructure, and the service providers and software as a service providers, our solutions are critical, and [Indiscernible] as well, Radware is in fact, a key enabler of the transition of applications to the cloud, and we've participated in this transition for multiple perspective with which the consistent execution of our vision to provide a unified application, a unified infrastructure for delivering security of applications.

In order to achieve this, our development efforts over the past years have focused on security related applications, and similarly both our security and applications delivery for the client.

In other words, in all of our ABC offering a shift of the load balancing for the customers' datacenter, specifically to be an integral part of the comprehensive holistic portfolio that provides an end to end solution for applications' delivery and security. As, a key component of our strategy and to increase market footprint, are OEMs and alliances.

We are pleased to have successfully established relationship with multiple players in the security space, such as Check Point and Cisco, and with our progress with these partners. Let's discuss business performance by region. In the Americas, it was a solid third quarter. The market shift to the cloud was the strongest in this region.

And we balance all this with the shift from products with subscription for our business. In EMEA market conditions continue to be challenging. We have a strong pipeline there. But sales [Indiscernible] alone, and the face of [Indiscernible] closures is [Indiscernible].

In Asia Pacific, we believe we've taken the right steps, and in some countries begin to see the expected results. Given the diversified nature of this region, we expect it will take a few more quarters to return to growth.

Across our business, we continue to strengthen our sales and marketing capabilities, collectively adding resources in certain places. We are particularly focused on the facilities available for our subscription business and cloud offerings. We aim to grow in our access to such a community in order to significantly grow our business.

Looking forward, we are strongly positioned to benefit from the key long term trends, such as the continued shift of applications to the cloud, with [Indiscernible] increased adoption of software defined networks, and as a revolving security [Indiscernible]. The continuous evolvement of security threats with under this profiles in recent weeks.

IoT bottleneck attracted attention with the [Indiscernible] bought in September, and the high profile DDoS attacks [Indiscernible]. While [Indiscernible] is not a Radware customer, the establishment of these DDoS attacks affected multiple carriers and service providers, including some of our customers.

As far as we are aware, our solutions protected our customers successfully, and most importantly, automatically.

This success confirms the superiority of our unique behavioral protection technology which enables automatic detection, real-time creation of a dynamic [fingerprint] to match the attack and mitigation and termination of the attack whether previously known or not, the event machine learning capabilities.

These attacks demonstrate security risk accompanying the proliferation of IoT, and we expect demand for our products to increase, as the amount of connected devices continue to grow. The DDoS attacks clearly demonstrate that cloud-delivered services such as DNS, require tight security protection, and real-time visibility.

And companies [indiscernible] a complete review of all the different components of their infrastructure, whether in-house or supplied by third parties, in order to avoid down time and [indiscernible]. I remain confident in the growth prospects of Radware.

We have a unique product portfolio with very strong technology, which provides genuine competitive advantages in a very exciting market. We believe that we've chartered the future, and once the shift in our business model stabilizes, we can deliver sustained growth and strong financial results. With that, I will open the call for Q&A..

[Operator Instructions] Your first question today comes from Jess Lubert from Wells Fargo Securities. Please go ahead..

Hi, guys. A couple of questions, perhaps you can help us understand what percentage of your business is subject to substitution from a subscription-based alternative, and where we are in that transition to subscription-based services.

And in that regard, as we build out our models for next year, how we should be thinking about seasonality as we work through this transition, and to what extent you would expect to see growth throughout 2017, or if we should be thinking about that as more backend loaded..

Okay, so what we are seeing is as I've mentioned in the previous calls, is the deals that used to be product only have now significant components of subscription. As a result of that, the deferral of such deals is large. You can assume that in the ABC business, strictly load balancing, there's a smaller proportion as they grow, of subscription.

While in security, we are encouraging a subscription of cloud security solutions very strong to the point of every win ultimately will involve one component of subscription or more than one. So down the road, this might be a significant portion of our complete booking in a certain quarter.

Regarding seasonality, the way we are [indiscernible] in our business is on a year-over-year basis, for both the product and subscription [services]. Of course, with the growth of subscription and services, as part of the complete revenue recognition, those trends might get more smooth than we see them today.

But at least for the short coming future, [there's still] there you see the regular seasonality in our business, we believe..

Right. Historically Q4 to Q1 you see a big sequential downtick, and then you see sequential growth through the remainder of the year with Q4 the strongest quarter. Is that the right way to think about next year? And maybe just last one from me is, we look at this transition across the different geographies.

Where should we start to see the turn first? Which geographies may lag a little bit? So we can kind of see if things are progressing as you've laid out..

So without going into any of the outlook for Q1 or the rest of the year, for 2017 I would expect the same trends as we've seen before, a decline between Q1 versus Q4 numbers, and then probably an increase. As well we will provide specifics in Q1 in our next quarter. Regarding the shift, I think as I've mentioned in my prepared remarks, the U.S.

is the furthest in the proportion of subscription. And so you this out of the services business. And I think over there we're already starting to see some signs, quite consistent growth, as well as was mentioned, it's a mix of product growth, regular product growth and the overall business growth, together with this mixture. But I think the U.S.

is the leading indicator as far as our regions for the business, for the new type of business mix between subscription services and products..

Your next question comes from Joseph Wolf from Barclays. Please go ahead..

Just in terms of the growth commentary and that last comment on year-on-year comps, if I look at 4Q 2014 versus the guidance for this year, there's about a 15% decline in revenues, and about 10% from last year, 9% to 10%.

Can you just talk about the subscription transition in that mix or maybe is there a way for you tell us-- you mentioned that subscriptions are accelerating-- can you tell us what percentage the subscriptions were in terms of the mix of bookings in this quarter compared to either a year ago, or even compared to 2Q?.

So we're not breaking the overall deferred revenues of subscription and services. But as we've mentioned in our remarks, the big driver for the growth is coming from subscription. You can see that from our remarks that year over year the subscription-based services while maintaining roughly the same length, grew $25 million.

So I feel that's a very strong point to the growth we have in subscription overall, and as well as how the mix is moving from the 10%, 9-10% we mentioned reduction in recognized revenue that is the close to 30%, which is in the total deferred revenue..

I guess a question-- you mentioned cloud transition. And you've got a healthy mix of enterprise customers.

Are you seeing the enterprise customers move to the public cloud, AWS or Azure type services? Is that impacting their purchasing from you? Or do you have enterprise customers that are requesting your types of services, even as they move to the public cloud?.

Yes. So this is exactly what I was trying to discuss when I mentioned enterprise customers. Assuming they move to the public cloud, there still is a high risk of security solutions. In they move to an Amazon or Azure or any other type of cloud, the need for our web application firewall cloud or business cloud is just increasing.

So we have many customers that are either cloud only, meaning that they don't have more an on premise datacenter; or they are in a hybrid security, meaning they have several datacenters, physical datacenters as that are as their own plus applications in the cloud.

And in that situation, they really want to have a consistent security capability across all the infrastructure, whether it's public cloud or not, the hacker doesn't [Indiscernible]. So when I'm protecting the company that's in both places, if they don't have a unified view [Indiscernible] one in the cyber world, [Indiscernible].

What we are providing with our cloud solution, and as I've mentioned, there's either a cloud only solution or hybrid cloud solution, meaning there's a component on prem, be it the public cloud or a private datacenter in our cloud security; regardless of how the customers are deploying our cloud solution, they have a consistent view across all their assets.

They have a consistent detection and correlation of events. If an event is happening only in the public cloud or only in the datacenter, in a consistent policy of mitigation and it's feeding up information regardless where the attack happens. So this is a very, very strong value proposition. If you're going to the cloud, you absolutely need security.

If you're a hybrid, you absolutely need consistent security for both, a real challenge in these specific market attacks across the datacenters..

That was helpful.

Just one last question, if you look at the DDoS events over the last couple weeks, could you just give us a rough ballpark of how many of your DDoS customers are looking at this as a preemptive solution, and how many of them are reacting and don't make that DDoS purchase decision until they've already been attacked?.

I think it varies. Of our existing customers, obviously they've taken action. But if you're asking for [Indiscernible] in general, I think it's a big question in the vertical market. I think in the financial segment, clearly cloud and hosting in some verticals there's a clear call for action.

And in some verticals that are less online exposed, I believe that they are more overweight in key budget prioritizations, sometimes only against cyber stress, etcetera. But it's now mixed. But definitely, with that said, is the last one.

And I can tell you there are daily multiple attacks that we are detecting in our customers [Indiscernible] services. Where clearly the level of activity, I would say, of attacks around the world, whether it's politically motivated, financially motivated, activism; it doesn't matter what it is. It's clear that people will need to take action..

Your next question comes from Mark Kelleher from DA Davidson. Please go ahead..

Great. Thanks for taking the question. Just first, some clarification, I didn't catch the gross margin guidance for the December quarter.

Could you just repeat that?.

82.4%.

Okay.

And could you give us an update on Cisco and how that partnership is progressing?.

Yes. So Cisco is progressing well. We started to receive the first orders. We are expanding the footprint, the number of appliances and product lines with Cisco that we are residing on. And now we're looking forward to growth there. But so far, so good..

Okay. And then on the balance sheet, just getting back to deferred revenue, it was down pretty significantly sequentially. But if you add the unbilled contracts, it was actually up pretty significantly.

So is that the move to subscription? Is that what we're seeing there? Is that what that gap is?.

So I think if you're asking the growth important to [indiscernible]..

No. The unbilled contracts are pretty significant..

Can you repeat that, sorry?.

Yes. So deferred revenue was down sequentially. But if you add the unbilled contracts, it was up pretty significantly. So the unbilled contracts are a very large portion of that.

So is that what we're seeing from the switch to subscription, a lot of unbilled contracts? And if so, what's the ability of customers to cancel those contracts?.

No let me talk, if I remember, then maybe then [indiscernible]. The numbers that we grew both with deferred revenue in the balance sheet is from $55 million to $73 million at the [indiscernible]. And the total deferred revenue defined in the remarks grew from $85 million to $110 million.

Obviously what we consider was both the number, is one thing that is quite firm. We have no reason to believe it's something that supposed to be cancelled or something that is out of this equation..

One comment, Doron mentioned in the review of numbers, the total deferrals is not about unbilled contracts. It's about not collected. So those are invoiced but not collected yet. So the real reason there's a closed order trend [indiscernible]. We are not even referring to contracts that may be all kind of exits for convenience, closures, et cetera.

What we see with the total of these sales is that deferred revenues on the balance sheet plus the billed but not collected yet deferred revenues..

Okay. I'll follow that up a little bit more offline. Thanks..

Your next question comes from Rohit Chopra from Buckingham Research. Please go ahead..

Thank you. I didn't catch, Doron, the tax rate, so if you could repeat that, that's the first clarification there. And then my question is on OEM revenues. I just wanted to get a sense how Check Point is doing.

And then what gives you the confidence that the Cisco relationship is going to perform better than Check Point, given Check Point's the largest pure play in security. They were selling a security solution. They're in your backyard. And it doesn't seem that they're performing well.

But I just wanted to try to get a sense of what's different between Cisco, what's different between Check Point, if you don't mind..

I will start with tax, at the top of our guidance it's approximately 16%..

And regarding the OEM performance, of course there's no guarantees. But the Cisco relationship and the Check Point relationship are going after different types of providing our solutions to the market.

The Check Point relationship that we believe is progressing positively, is really supplying DDoS solutions in a separate appliance very similar to how we are selling our solutions to customers. In that regard, they are providing us more market coverage and access to their customers, and allow us to increase our market share.

The Cisco relationship is part of the next-generation firewall market niche. So Cisco is not selling an attack mitigation or a DDoS solution standalone. They're only selling this as part of their next-gen firewall.

In that regard, it opens for us a channel to be billed then as part of next-generation firewall build, the [indiscernible] of customers interested or can afford a dedicated DDoS-only solution. So I think those are, again, expanding our footprint and go-to-market opportunities.

We're seeing again through Cisco, an access to a set of customers that we are not able to get to by ourselves, and mostly Check Point is to advance [indiscernible] account. And number three, it affords us the opportunity that again we're not [indiscernible], but are a broader, I'd call it early-on next-generation firewall build.

So we're actually feeling good about the mix, the opportunities that we exploit through the OEM partners. And we need to see the impact from both Check Point and Cisco..

Roy, may I ask a quick follow-up? As you look back at this past quarter, did you experience any incremental competition either on the ADC side or on the security side?.

No. Nothing specific..

[Operator Instructions] Your next question comes from Catharine Trebnick from Dougherty. Please go ahead..

Mine is on the Cisco relationship. What type of marketing activities are being put in place to facilitate the drive of that relationship? And then any-- is this going to be recorded in the services segment of revenue or in the product? And then finally, can you give me the product-services split? I didn't catch that on the call earlier..

So regarding the Cisco relationship, the marketing activities done by Cisco. It's a Cisco product. So it's the firewall, a next generation firewall, and they are pushing it through the [Indiscernible] advantage. The challenge then is to internal activities and showing, etcetera.

So it's not a Radware product, and it's not a Radware product that we sell in our channel. It's completely a Cisco product, but the Radware software is embedded. Regarding the product recognition there, it's exception. It's a type of product with accompanying maintenance contracts to it.

So the maintenance goes to the services line, and the license goes to the product line..

Okay. Thank you. And now, Doron, what was the product services split? Thanks..

Could you repeat the question?.

The product how much is it 70% products this quarter, 30% services?.

No, no. Sorry. We don't provide this information on a quarterly basis, only on the full year..

Okay. Thank you..

Actually we might be able to share.

Catharine, you might be referring to enterprise service provider revenues?.

Oh, no. Usually, you usually give a product/services mix. I just fine. Thank you..

And presenters, we have no other questions in queue at this time. I'll turn the call back to you for closing remarks..

Okay. Thanks a lot, everyone, for joining us, and have a great day..

This concludes today's conference. You may now disconnect..