Anat Heilborn - VP, IR Roy Zisapel - President, CEO Doron Abramovitch - CFO.

George Notter - Jefferies Catharine Trebnick - Dougherty Alex Henderson - Needham Jeff Pribyl - Wells Fargo Securities Michael Kim - Imperial Capital.

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Radware Q2 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be question-and-answer session. [Operator Instructions] Thank you.

Anat Heilborn, VP Investor Relations, you may begin your conference..

Thank you, Lisa. Good morning, everyone, and welcome to Radware’s Second Quarter 2017 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 first 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 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 these 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 as amendment on May 16, 2017. Please note that in August, management will participate in the Oppenheimer Technology Conference in Boston. With that, I will turn the call to Doron Abramovitch..

Thank you, Anat. Good morning, everyone, and thank you for joining us on the call today. We are pleased to report solid results for the second quarter with revenues at the high end of our expectations and earnings in line with our expectations.

The transition of our business model leads to a growing proportion of revenues from our subscriptions business. This coupled with the growth in the revenues from support contracts were our clients has install base lead to a growing proportion of recurring revenues which improves a visibility into the future performance.

Let us now discuss the results in more detail. Due to revenues over $51 million up 3% from Q2 last year. Revenues from the America were up 10% from last year and accounted for 47% of total revenues. Revenues from Asia Pacific increased 1% from Q2 last year and has presented 27% of total revenues.

And revenues from EMEA were down 7% from last year and represented 26% of the total. We will now move on to discuss expenses and profit using non-GAAP figures. Our detailed GAAP to non-GAAP reconciliation, please refer to the financial table accompanying our press release or to the Investor Kit posted on our website.

Non-GAAP gross margin was 82% in Q2, 2017, compared to 82.7% in Q2 last year. Our operating expenses were $41.7 million compared with $39.6 million in Q2, 2016. The main differences from last year are the consolidation of secular that had an impact of roughly $800,000 and a stronger Israeli Shekel that had an impact of roughly $750,000.

We also had higher investments in expanding our cloud offering compared to last year. Operating expense as in Q2 was slightly higher than our guidance mainly because the currency impact was stronger than we had expected at the beginning of the quarter.

Assuming exchange rates remain at their current level, our operating expenses for the remainder of year will continue to be affected. We expect operating expenses to increase in Q3 and more so Q4 due to higher sales commission on the expected increased level of bookings as well as marketing activities.

Headcount at the end of June 2017 was 983 employees essentially at the same level of previous quarters. Non-GAAP net income in Q2 '17 was $1.2 million or $0.03 per share diluted compared with net income of $2.6 million or $0.06 per share diluted in Q2, 2016. As of June 30th, 2017, we had approximately $326 million in cash and financial investments.

Cash generated from operations was $11.4 million in Q2, compared with $7.8 million in Q2 last year leaving our operating cash flow from the last 12 months at approximately $40 million. Our collection in Q2 was strong as reflected in the DSO ratio which was as low as 31 days. Once again, our total differed revenues balance showed strong growth.

And of the end of June, we had total differed revenue balance of approximately $133 million up 35% from $99 million in Q2, 2016. The average duration of the total differed revenues balance was 1.78 years compared to 1.79 years in previous quarter and 1.76 year for June 2016.

Though, in the coming 12 months, we will recognize as revenues approximately $83 million out of the total differed revenues compared with $65 million that will recognize out of the total differed revenues a year ago. This growth highlights the better visibility we are gaining with the increase in our recurring revenues.

Last, our outlook for the third quarter for 2017. We expect Q3 revenues to be between $51 million and $53 million. Non-GAAP gross margin is expected to be approximately 82%. Non-GAAP operating expenses are expected to be between $42 million and $43 million in Q3. We expect non-GAAP effective tax rates to be 16%.

Non-GAAP EPS for Q3 including the dilutive impact of secular is expected to be between $0.03 and $0.04. I will now turn the call over to Roy..

Thank you, Doron. And good morning, everyone. We are very pleased with our results for the second quarter of 2017 in which we continue to execute on our strategy. We delivered revenues at the high end of our expectations. Totaled differed revenues grew 35% year-over-year and cash generation was robust. We continue to grow our subscription business.

The subscription offering which includes product subscription, our cloud service offering and fully managed services provides our customers with compelling security in application delivery solutions while reducing operational burdens on the internal resources. At the same time, this offering improves our visibility into future revenues.

An indication of this improvement is the ratio between our total differed revenue balance and our quarterly revenue which was once again more than 2.5 times. We continue to make progress in executing on our strategy. The first element of our strategy focuses on the integration of our application delivery and security offering.

In Q2, we were delighted to win a cross portfolio deal with the largest Telco Company in a Latin American country. The customer is preparing for the loans. So, for mobile payment platform which is a critical service that requires optimal performance and stringent protection.

Radware was the only vendor capable of offering leading DDoS mitigation, web application security and application delivery technologies as an integrated system. And our holistic approach was highly appealing to the customer.

We are glad to help this Telco Company mitigate the risk of operational disruption caused by security attacks as well as ensure high availability. The second element of our strategy focusses on the innovation of new solutions and services. In early June, we announced a new line of ADC devices called the Alteon D-line.

The D-line enhancement focuses on industry leading SSL performance in order to continue grow our security-driven ADC sales. The new line supports the latest encryption standards and ensure industry leading cost effectiveness in processing encrypted traffic.

The cost effectiveness runs across the line, so that customers can benefit from SSL processing which is up to 100% more efficient than the competition, whether their needs are modest or expensive. Such processing power is a critical need as encrypted internet traffic takes up an increasing share of total traffic.

The ability to inspect encrypted traffic while complying with privacy standards as well as reducing latency is very important to our customers and the D-line was well received.

One example is TierPoint; a hosting company that is protecting its physical and virtual infrastructure with our technology and has recently introduced DDoS defense service for its customers which is powered by Radware solution.

Last quarter, TierPoint made the follow approaches that consisted of new Alteon D-line devices as well as our web application firewall.

Providing high performance SSL offload and web application firewall service to expand their in-house security offering and enable them to differentiate their offering and maintain stronger relationships with their clients. The third element of our strategy focuses on increasing our market footprint through diverse sales to market.

Three weeks ago, we announced our relationship with Nokia. Our attack mitigation solution is now part of Nokia's offering to carriers and Telco cloud providers. This means that when Nokia provides its complete network transformation solution for service providers, Radware is its DDoS mitigation partner.

During the first half of 2017, we already participated with Nokia and several deals and we currently see a solid and growing pipeline of additional opportunities Nokia is leading.

The Cisco VM continues to progress in the sense that in the quarter following the introduction of our DDoS module on Cisco Next-gen firewalls, we have seen a marked increase in activity and pipeline buildup as well as new wins which we will begin to recognize as revenues in Q3.

During the second quarter, we announced our largest deal as of with a leading CDN provider. This is an existing customer who expanded this engagement with Radware by purchasing additional hardware maintenance and subscription to attach mitigation updates. This deal is separate from the one we announced in the first quarter and discussed with April.

And we are pleased with our increased presence in the content delivery network provider space. We view this presence as a validation of the quality of our offering. In summary, Radware performed well in the second quarter of 2017 and the visibility we have into the reminder of the year suggests this trend will continue.

The business environment is solid and we're adding new opportunities to the pipeline at an accelerated pace. We are confident in our ability to meet our plans for the year. Our ongoing focus on research and development continues to bear fruit in our solution offering is industry leading.

And it's ability to detect and mitigate attacks in flexible deployment options and to meet the challenges of an increasingly complex delivery environment and constantly evolving cyber threat landscape. The digital transformation and the trends towards cloud migration present us with multiple opportunities.

And we continue to sharpen our sales and marketing effort in order to capture them. We are confident in our ability to expand our mind and wallet share within existing customers as well as acquire new ones, resulting in long term growth for Radware.

Before concluding, I would like to thank the Radware team, our partners and customers for their support. With that, I will now open the call for Q&A..

[Operator Instructions] Your first question comes from the line of George Notter from Jefferies. Your line is open..

Hi guys, thanks very much. I guess I would like to just start about asking about the Cisco OEM relationship. I realize it's still early, I realize there is a lag in terms of getting updates from Cisco on sell through of your software module alongside the Firepower platform.

But any kind of early feedback you have from Cisco in terms of your customer acceptance on that DDoS module, any data you have on attach rates, anything you can tell us in terms of how Cisco is training their sales organization to market and sell that software module along with Firepower, would be very helpful. Thanks..

So, the feedback we're getting is very positive. When I mentioned that the pipeline is growing in accelerated rates, Cisco is one of the I would say strong contributors to that. So, we are seeing an increased pipeline from Cisco by the week.

And the early wins also suggest that for us these sales engagements might be of low touch, relatively low touch to what we are used to in the deals we are involved. And we contribute that first to the region customer relationship of Cisco but also to the fact that we are an add-on module on the firewall, meaning it's not a complete standalone sale.

It's an add-on and it adds security as part of an initial gateway there. Regarding training and visibility, we just participated in Cisco Live in Vegas, it was extremely successful for us together with Cisco and we are part of the global sales kick off coming soon after the fiscal year end and there's another training for all the four days.

So, we are very encouraged with the momentum that this relationship has..

Got it.

And then, as you look forward, is there a point where you give us metrics in terms of sales volumes with Cisco or attach rates or when do we expect to hear more quantitatively?.

So, on a touch rate, I'm not sure we will have this information given it's internal to Cisco. And regarding revenues, I believe we know given the I would say the gross margin and the high profitability of this engagement, once the sales are becoming meaningful, it will be easily seen in our P&L..

Yes, okay, right. Good luck with that and thanks very much..

Thank you..

Your next question comes from the line of Catharine Trebnick from Dougherty. Your line is open..

Thanks for taking my question. Mine is quickly just on the Nokia. If you could provide you had said that there were some deals. I just wanted to clarify that correctly that they closed already or the pipeline and then can you give us a little idea on what region seemed to be tracking with that opportunity for them. Thank you..

Okay. So, the deal is about the security solution for carriers for Nokia. It involves the routers, their Deepfield NetFlow detection capabilities that they required and the Radware DefensePro as the mitigator. We already closed with them several customers and a couple in Europe and some in Asia Pacific.

I think the most traction we're seeing is the first in EMEA, then APAC and third is North America. The deals closed and some started to recognize..

Okay, excellent. Thanks Roy, I'll fork back for more questions. I appreciate it..

Our next question comes from the line of Alex Henderson from Needham. Your line is open..

Thanks. I was hoping to ask a question around the enterprise versus the service provider. I mean, clearly your service provider business is doing extremely well. And I guess what I'm trying to determine, is there a difference in the way the service provider is being recognized on revenue basis versus enterprise.

Is there more SaaS related deferrals in the enterprise piece versus the service provider that accounts for the variance in the relative performance?.

Yes. So, that's a very good point. But generally when we sell to service providers, they buy from us equipment and they use that to build their service or their cloud services or network services to the customer.

I gave the example of the CDN provider, I gave the example of TierPoint, those are basically equipment and maintenance sales and some subscription but predominantly product sale to this segment. Enterprises are the ones that are behind the growth in our cloud services where they consume the security service or acceleration service directly from us.

So, most of the differed I would say is impacted by enterprise purchasing cloud subscriptions or product subscription in the service provider is much more appliance based sale..

I see. That makes a lot of sense. Second question if I could.

When you're dealing with the change in the architecture at Cisco to intuitive networking, a big piece of that was the integration of the content they're getting from their vast majority of environment information that they get off their routing and switching and security platform and feeding that back into a big data analytics platform.

Are you getting any access to that kind of data as part of your partnership that you're feeding into your cloud platform or is that something where they are retaining that information for internal use?.

Yes, okay. I don’t want to directly comment of that, Alex, for obvious reasons. I would just say that what we are doing in the Cisco environment and the intent base networking is very tightly coupled. It's directly in line with this strategic announcement process..

So, just going back to the cloud piece of that equation. Is there, is that -- is your cloud based database solution dataset significantly increasing without tying in necessarily to the Cisco. I mean, obvious to the R-squared is directly related to the size of that database and the currency of that database..

Yes. So, I'll split between our own cloud services that we provide to customers. That is no relation or access to the Cisco information and our integration our efforts together with Cisco on their own platform..

Okay..

So, we as a company and our own cloud services we don’t have an access but obviously we are playing a part of the intent based networking within the Cisco offering with our software embedded into their product..

Alright, I'll see the floor. Thanks..

Our next question comes from the line of Jeff Pribyl from Wells Fargo Securities. Your line is open..

Hi, guys. I also have a couple of questions. Maybe just to start, I wanted you to take a little deeper into what you're seeing in your enterprise business. We've now seen sequential declines here and nine in the last 10 quarters. So, I guess I was hoping to understand that this was a function, solely a subscription headwinds.

If there were other factors that play here and to the extent it's a subscription issue.

When do you think will begin to net positive or a subscription tailwinds or more than offsetting some of the headwinds and start to see the enterprise business starting to trend a little bit higher?.

Okay. So, from our booking perspective when we see the complete picture and we'll open the total differed et cetera. The enterprise business is doing well. We're seeing excellent traction for example in North America and so on. Some of the business is being sold through multiple channels today.

Some of them we're selling directly to the enterprise business, some are using cloud resellers to reach them. But I think we need to understand that some of the environment is changing and the type of channels one can use are changing.

It's not always we are selling directly to the enterprise, many of them were just fulfilling today through our cloud partnerships as well. Overall, I think the enterprise business is healthy and as I said in previous I'm sure that's the engine behind the growth in our total differed business, which is substantial.

So, in our analysis we're doing quite well there. We believe we will continue to do well. I cannot give you the exact timeline when you will see the enterprise analyze by itself regardless of cloud resale, regardless of the balance of total differed starting to grow, but it sells it. We don’t see a problem..

And then, I was hoping maybe you could touch a bit on what we're seeing in Europe and the European business continues to trend downward. Is that also a function of subscription or are there are some macro factors there? A number of your peers have talked about some weakness in year up. So, just would like to understand what you're seeing there..

So, from geography point-of-view, the U.S. is the one most participating in subscription, then EMEA, and then APAC. So, that's one comment I would like to note on our EMEA performance. The second comment is that this quarter it was down but if you look on the first half, it's actually up 4% without taking into account the deferral that takes place.

So, overall we think we're seeing solid trends in EMEA and also we are focusing for the third quarter solid demand there as well..

And maybe just last one for Doron. I was hoping you could help us understand to what degree you would expect to see operating margin improvement in the second half of this year relative to last year. It seems like investment levels are trending a little bit higher for a couple of reasons.

But is there a proactive decision here to invest ahead of sales for future opportunities or if revenues come in as you expect.

Should we see some operating margin improvement in the second half?.

Okay. Think that you noted from Roy's comments that there is a gap between of course between the bookings and between the revenues, they are the actual business reality is just OpEx are related to the booking. So, when we are doing quite okay in terms of booking you see it in the different revenues et cetera and revenues are a bit behind.

So, as for the improvement, we will see some improvement but I mentioned in my remarks that we will add some OpEx expenses in Q3, which would be between $42 million to $43 million. In Q4, it should be even more than this. I assume something like $43 and above. So, it's all relates at the end of the day to a level of the fourth quarter revenues.

But overall, I believe that we control and monitor our expenses, they're very good. But in a way when it relates to the booking, there is some gap that I believe that we will close it in the next few quarter but I'm not sure that in Q3..

Thanks, guys..

Our next question comes from the line of Michael Kim from Imperial Capital. Your line is open..

Hi, guys.

Could you throw an update on the activity around the DDoS protection Suite that you introduced last quarter and how that's progressing on AWS?.

Okay. So, I think one of the strengths of our capabilities is the ability to run and cover every environment.

So, today we're covering own prime protection in enterprises, we are covering DDoS scrubbing in carriers, we are providing cloud services and since last quarter we are also covering where the first solution to cover the AWS environment without being always on in terms of coverage.

So, we are seeing that as an another layer of a comprehensive attack mitigation service we provide. And for the large enterprises where they have some assets in the private data centers and some assets in the cloud, this is a very strong offering and unique. We are the only ones in the world that can provide that.

We started to see some of our major customers adding up these capability and taking also that into account in the new standoff. So again, it's another step in our leadership in the space. It’s one dimension out of many others but it consolidates our position as not only the market share I believe leader but also the innovative in this space..

And can you remind if you have similar fully managed service for Azure or some of other public cloud platforms?.

Azure we said is next, it's coming soon. We started with AWS obviously for the [indiscernible] size of the market share..

Got it and then switching gears to capital allocation I don't think I saw any share buybacks in the second quarter.

Have there been any buybacks in the third quarter and maybe how you are thinking about capital allocation through the second half?.

For the vast majority of Q2 we didn't have capital profile to execute any buyback so we didn't. Since mid July we have such an approval and we have 25 plans in place in accordance with our board guidelines. This is for the first part of the capital allocation.

And the second part is we continue to look for opportunities in terms of the M&A we mentioned this more than once so these are the two elements that are combining for capital allocation..

Got it, great, well thanks very much..

And our final question today will come from the line of Joseph Wolf from Barclays. Your line is open..

Hi, it's Erica for Joseph. We just had a couple of questions. I guess maybe following on to some of the earlier questions, broader one can you give us any color in terms of sort of where given some of the dynamics you were talking about earlier with enterprise versus service.

Where you are in terms of your move to more of a subscription model just trying to kind of think about with what you were talking about earlier and then I have a follow-up?.

So, I think you can see from our total deferred metrics that it's progressing very well. The biggest I would say contributor to that goal is the addition of subscription that were booked and invoiced and did not translate to revenue recognition.

But we are seeing strong growth in these elements of our business as Doron mentioned it gives us visibility, it gives us also overtime a big budget allocation from our customers in a very intimated relationship. So I think we are progressing well and we continue to invest in that.

Some of the OpEx additions are targeting more build out for cloud environment across the world as we see better and better traction for these initiatives..

Okay.

So I mean, most of the deferred is enterprise and enterprises is cloud, then can we infer that, can we look at that and say that's kind of where you’re sort of trending on a subscription versus non-subscription basis?.

Yes. So most of the addition in cloud is related to enterprise and for obvious reasons most of the total deferred or the subscription business is enterprise driven.

What I mentioned is enterprise driven can be either we resell it directly through our channels to enterprise or some of our channels that our cloud service providers resell our solution to enterprise.

Both are contributing to our total deferred going up and both are in the end new wins in the enterprise space whether directly or through our cloud reselling partners..

Okay.

We can follow-up a little bit more later and the other question I had was on just general momentum going into the end of the year on sort of DDoS and security, budget planning are you seeing increased interests on sort of a seasonal basis? And lastly with regard to secular, how are you going to treat that sort of going forward is that going to turn into sort of a third product line or you are going to be reporting that in with everything else.

How do we think about that?.

Okay. So first regarding seasonal trends, we don't factor it in so obvious that Q4 is generally stronger in past years, but we are still focused on the quarter third. And we are just seeing solid demand across the world for security whether it's coming from our secure ADC solutions or our attack mitigation solutions or cloud it doesn't matter.

It's really across the board, security continues to be very strong and top of mind.

And regarding secular as I’ve mentioned it's going to be a cloud service so it's going to add to our subscription build out in the future once we release the product and it's going to add another layer for attack mitigation solution, one of big data and analytics on top of our solutions basically opening another dimension of securing data centers..

Okay.

And I guess just one last one if I can just really quickly ask, the OpEx in the second half is all of the increase in that is going to be from like a sales commission kind of perspective or is there anything else in that sort of expectation or it is just that ramp-up in sales that you were talking about earlier?.

In a way part of it relates to the currency which I have mentioned even comparing Q1 to Q2 and in terms of these [indiscernible] the impact on finances was something like $500,000 to $600,000 so if this level of currency will remain this is one part.

The other part relates to the business, to the commissions, to the marketing activities that we plan to do in Q3 and Q4 as I mentioned. The actual business reality is that they will lead to the bookings. .

Okay, alright, thank you..

I will now turn the call back to presenters for closing remarks..

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

This concludes today’s conference call. You may now disconnect..