Anat Heilborn - Vice President of Investor Relations Doron Abramovitch - Chief Financial Officer Roy Zisapel - President and Chief Executive Officer.

Alex Henderson - Needham & Company, Inc. Ittai Kidron - Oppenheimer & Co Zack Turcotte - Dougherty & Company George Notter - Jefferies LLC Joseph Wolf - Barclays Capital, Inc. Michael Kim - Imperial Capital.

Good morning. My name is Virgil, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Radware Q4 2017 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] Thank you.

Anat Heilborn, you may begin your conference..

Thank you, Virgil. Good morning, everyone, and welcome to Radware’s fourth quarter and full-year 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 fourth 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 are 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. I would like to remind you that on February 20, Radware will host an investor meeting in New York where members of the executive team will provide an update on the Company's business and outlook.

If you'd like to join us please email me at ir@radware.com. 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 strong results for the fourth quarter with revenues and earnings above our expectations and a record level of total deferred revenues of $148 million. Revenues for the fourth quarter were $58.5 million, up 13% from Q4 last year.

Revenues from the Americas were up 27% from last year and accounted for 49% of total revenues. Revenues from EMEA increased 1% from Q4 last year and represented 26% of total revenues, and revenues from Asia Pacific were up 4% from last year and represented 25% of the total. Full-year revenues were $211 million and up 8% from 2016.

Full-year revenues from the Americas increased 16% from 2016, revenues from EMEA increased 5%, and revenues from APAC declined 2%. Full-year revenues from the enterprise vertical grew 2% for 2016 and the service provider vertical revenue grew 21%. Next, I will discuss expenses and profit in non-GAAP terms.

A detailed GAAP to non-GAAP reconciliation is presented in the financial table accompanying our press release as well as in the investor kit posted on our website. Non-GAAP gross margin was 82.3% in Q4 2017, compared to 82% in Q4 last year. For the full-year, non-GAAP gross margin was 82.2%, compared with 82.4% in 2016.

Our operating expenses were $45 million, compared with $40.6 million in Q4 2016. The main factors driving the increase from last year are the stronger Israeli Shekel, which had an impact of approximately $1.3 million.

The consolidation of Seculert which had an impact of approximately $700,000 and higher sales and marketing expenses and sales commission. Compared to Q3 2017, the main driver for OpEx increase is higher marketing activities and sales commissions on increased business activity.

Headcount at the end of December 2017 was in line with its level in the past two years. We expect this cost structure to continue support our growth also through 2018. Tax expenses in the quarter were $632,000 or 14% of our non-GAAP pre-tax income leaving full-year tax rate at 18%.

Note that our non-GAAP tax expenses were not affected by the change in the federal corporate income tax despite a remeasurement of deferred tax assets that decreased our GAAP tax expenses. Going forward, we do expect an impact on this change and estimate our 2018 non-GAAP tax rate at approximately 14%.

Non-GAAP net income in the first quarter of 2017 was $3.9 million or $0.09 per share diluted compared with net income of $2.5 million or $0.06 per share diluted in Q4 2016. For the full-year, non-GAAP net income was $7.6 million or $0.17 per share diluted compared with net income of $8.9 million or $0.20 per share diluted in 2016.

As of December 31, 2017 we had approximately $344 million in cash and financial investments. Cash generated from operations was $8 million in Q4. For full-year 2017, operating cash flow was $31.5 million, compared with $38.5 million in 2016. During Q4 as well as in third quarter we made $5.5 million tax settlement payments for prior years.

Our operating cash flow is not fully comparable through the fourth quarter and full-year of 2016. Our total deferred revenues balance continues to grow. As of the end of December, we had total deferred revenues balance of approximately $148 million, up 22% from $121 million as of the end of December 2016.

This is the second year in which we deliver such robust growth in our total deferred revenues. The proportion of revenues due for recognition within one-year remains stable at 62%.

Therefore, in the coming 12 months, we will recognize as revenues approximately $91 million out of the total deferred revenues, compared with $76 million that we recognized out of total deferred revenues a year-ago. Before I turn to Q1 2018 guidance, I would like to share some of our assumptions for full-year 2018.

Our total deferred revenues balance enabled us to expect an 8% to 10% revenue growth in full-year 2018. Our business model which consists of a growing proportion of cloud and subscription sales with total deferred revenues growth will be higher than the revenues growth. Starting Q1 2018, we will begin implementing ASC 606 in the retrospective method.

We expect immaterial impact on revenues and a small positive impact on profitability. I will conclude with our outlook for the first quarter of 2018. We expect Q1 revenues to be between $53 million and $55 million. Non-GAAP gross margin is expected to be approximately 82%.

Non-GAAP operating expenses are expected to be between $43 million and $44 million in Q1. As mentioned, we expect non-GAAP effective tax rate to be 14%. Non-GAAP EPS for Q1 is expected to be between $0.04 and $0.06. I will now turn the call over to Roy..

Thank you, Doron. We ended 2017 on a very strong note, delivering strong performance across multiple business parameters. Fourth quarter revenue grew by double-digit compared to Q4 last year, reflecting growth in all of our regional geographic regions. Q4 was a record bookings quarter with book-to-bill ratio once again significantly larger than one.

The main drivers are very robust performance in the Security business and the excellent growth we experienced in cloud and product subscriptions. The quarter concluded a strong year for Radware. In 2017, we had record bookings, revenue growth of 8%, a book-to-bill ratio significantly larger than one and total deferred revenue growth of over 20%.

Bookings grew in all three geographic regions and across both the Enterprise and the Carrier segments. We begin 2018 in a very strong position with excellent visibility and therefore we are very confident in our growth prospects in 2018 and beyond.

As Doron mentioned, in 2018, we expect revenue to grow 8% to 10% over 2017 and total deferred revenues to grow faster than that, reflecting continued strength in our Cloud and Subscription business. I want to take a couple of minutes and provide more color on our performance in data center security and in cloud and product subscriptions.

Starting with cloud and product subscriptions, we continue to expand our offering and grow this business. For example, in 2017, the number of cloud customers grew by more than 60% over 2016, about half of them completely new customers to Radware.

Our offering addresses our customer needs for data center security deliver it as a fully managed cloud service. It positions us with a strategic prospect partner that provides best-in-class security. This quarter, we expect to launch additional cloud and product subscription offerings. We will expand on that in our Investor Meeting later this month.

In Q4, we continue to invest in our global cloud infrastructure. This first quarter, the global mitigation capacity of the Security Center we use for our cloud security services has grown. In addition, more centers are now operational.

These new centers not only increase our ability to mitigate attacks of the larger scale, but also allow localized security services often a mandatory requirement to comply with local regulations.

Our success in the cyber security space is a direct result of Radware’s approach to provide our customers with a comprehensive solution against attacks targeting the data center.

We do not sell DDoS or WAF or IPS point product, but rather comprehensive data center attack mitigation solutions, whether it's an intrusion or a DDoS attack or a scan attempt, encrypted or not, our solution will detect and blockings.

In addition, our solution is based on a battery of unique mathematical algorithms for behavioral-based detection, all feel proven. The fact we use automated algorithms dramatically reduces the time to detect and the time to mitigate an attack. These capabilities are very well received by our customers.

For example in December, we announced we won a new Tier 1 U.S. carrier with an initial order above $1 million. This carrier selected our solution based on our ability to support the scale of the requirements and our ability to support the operations as an MSSP. So they are positioned to offer better cyber protection to their customers.

Today, we announced successfully securing one of the top 10 Global Telecom Groups as a result of three separate competitive displacements that we won in Q4. The incumbent solution could not keep up with the newer, more complex and destructive cyber attacks.

Radware was chosen to deliver both in line data center protection and the global scrubbing center for several operating units of this Global Telecom Group.

Furthermore, we continue to work closely with our OEM partners, Check Point, Cisco and Nokia and we are pleased with their increased level of commitment to our business and the increased exposure that these relationships provide us to new customers. In 2017, the three OEMs relationships brought us dozens of new customers.

Specifically in the new Global Carrier win we announced today, two of our OEM partners participated in the deals we mentioned. In summary, we are very pleased with our performance in both the fourth quarter and the full-year, and with the progress we made on all aspects of our strategy.

We delivered solid growth as well as set the stage for our future growth by enhancing our solution portfolio, broadening our customer base and go-to-market channels, and further developing our product and cloud subscription business. We are committed to continue to do so in 2018 and are excited about the opportunities that lie ahead.

In 2018, we expect to deliver growth in bookings, in revenues, profitability, and total deferred revenues. At the same time, we expect to continue to leverage the dynamics of our fast growing cloud and subscription business which ensures Radware’s long-term success, growth, and profitability. I will now open the call for Q&A..

[Operator Instructions] Your first question comes from Alex Henderson from Needham. Please go ahead..

Hey, guys. Great job. Starting to really payoff all this investment you made over the last couple of years. And that's really the nuts of the question, so as you're now shifting to a mature SaaS model, it certainly seems like there ought to be a catch up in the profitability as a result of that.

You saw some of that in the quarter, but how should we anticipate the gradual shift to higher profitability module here? Will your margins be adding a couple 100 basis points a year for a multiple years? Will it happen more rapidly? What's the slope of that? And then could you talk about 606? Thanks..

Yes. Okay. Thank you, Alex. So we're not guiding yet for the full-year profitability, but you're absolutely right, we do expect an improvement in profitability.

And I think it's clear from our prepared remarks about the growth we anticipate in 2018 and keeping the base, the cost of the number of employees relatively flat because we believe it fully support our model. We will share more details in our Investor Meeting..

As for the 606 question, so starting Q1 2018, we'll begin implementing the 606 in the modified retrospective method, which means the total impact will be adjusted in the return and it’s without updating the prior year’s numbers. As for the expenses, it will be – sales will be related into the commissions, which would be better for our margins.

But we need to correct some of the commissions on the outstanding total deferred revenues, and this will be some offset for this benefit. So overall in terms of profitability for 2018 as I said it will be a small positive impact..

Great. Thanks..

Your next question comes from the line of Ittai Kidron from Oppenheimer. Please go ahead..

Yes. Thanks. Hi, guys. Congrats on a good quarter. And like Alex, I like to see the transition happening. Good job. A couple of questions.

First for Roy, on the subscription side, I know you've tried to emphasize that you're selling a solution, the Attack Mitigation Solution, but can you tell me if there is really concentration from our service standpoint in one of the categories or the DDoS protection services still the bulk of your customers and revenue, is that the right way to think about it?.

I would not say the DDoS, but the DefensePro related solution, which includes DDoS, IPS, anti-scanning and network behavior that would be the bulk..

Okay.

And as we – we would talk about this a year from now, do you think that’s going to be materially different or is still that’s where the concentration is going to be?.

I think from other aspects of our subscription business model are growing now faster. This is also growing very, very strong growth as you see from numbers in the underlying total deferred..

Got it. Okay. And then regarding your first quarter guidance, Doron, I’ve kind of just looking at the model.

It looks like it just at the midpoint of your guide you are looking at about a 7.5 plus minus quarter-over-quarter decline, which is nor higher than past first quarters, and I am just kind of wondering under the assumption that cloud and recurring subscriptions are bigger portion of your revenue today than any other quarter.

In the past why shouldn’t we see less seasonality? Why are seeing more seasonality in your first quarter guide?.

Well, we still see the seasonality that we are looking at q-over-q. So we still compare ourselves to the first quarter. The first quarter is always and it will continue to be because we benefit some of our subscriptions, some of our services and maintenance mainly in the second half and particularly in the first quarter.

So overall, the 8% to 10% growth for 2018 compared to 2017 is one element and the second one, of course, is our guidance for the first quarter is the higher of course and then Q1 2017, I suggest we will keep this method of comparing q-over-q and not the previous one..

Ittai, just I’m not sure I quote your answer that the guidance is also $7.5 million less..

No. The midpoint of your revenue guidance for the March quarter, which is $54 million, you are looking at a 7.5% decline in quarter-over-quarter revenue. That’s the seasonal element and outside of 2016, if I remember correctly every other year was far less than that.

Just wondering, again with cloud being a bigger portion of your business why wouldn’t we see less of a decline quarter-over-quarter?.

Yes. So percentage wise that’s correct. But as our model kicks in more and more every year, as Doron mentioned, I agree with you. You would see less of such impact..

Very good. All right guys. Thank you very much. Good luck..

Thank you..

Your next question comes from Zack Turcotte with Dougherty. Go ahead..

Hi, Zack on for Catharine Trebnick here.

Just couple things on Cisco and Nokia OEM relationships, just if you could quantify at all the revenue impacts from that and the quarter or at least kind of how far along those relationships are? As well as kind of in relation to that the enterprise growth really down cycle last couple of quarters, just how much those partnerships contributed to the enterprise growth?.

So we don’t break these numbers, but across all the three OEMs, I would like to include also Check Point in that. We are very encouraged by the growth in these OEM relationships across the board and also by the growing commitment, not only on what they are doing with us today, but also in future plans. So I think all three are trending well.

I mentioned that in the Global Telecom Group to participated in the three deals we mentioned, so we see them more and more involved also in the large deals. As it relates to the enterprise market, I would say Cisco and Check Point are the one such in the enterprise market.

Nokia is focused obviously on the carrier market, and to some extent small portion of the Check Point and Cisco business is also a targeting carrier. So with this three, we feel we have a good coverage and a growing coverage of the market.

We’re seeing very good trend of new customers, completely new customer, they are brining to us and I mentioned that in my prepared remarks and we continue to be extremely encouraged by these relationships..

Got it. And just one thing real quick on the operating expenses.

We saw R&D and sales and marketing increasing a numbers sequentially, but really decreasing quite a bit as percentage of revenue throughout 2017, you see this trend continuing and – to keep driving operating margins the level they were at in Q4?.

Yes, as said we keep our cost structure as it was in the last couple of years. So eventually we believe we know that it will continue with this trend and we feel our focus for 2017 we will benefit and there will be some leverage on this one..

Got it. Thank you..

Your next question comes from George Notter from Jefferies. Please go ahead..

Hey, guys. Thanks very much. I guess I wanted to ask some questions about the Cisco OEM relationship? Can you talk about what kind of – I think you've been selling our Cisco for gosh – 7 months to 8 months in an aggregate and this is since they got their new hardware and software instances out on the firepower platform.

So I guess the question now is what are attach rates looking like with your virtual DefensePro product? Also curious about what your versions of that product customers are buying? And then also I'd love to hear more about the effectiveness of the Cisco sales force in selling firepower along with virtual DefensePro? Can you kind of talk about where the relationship is and what you expect going forward? Thanks..

So first I want to remind everyone that when we recognize fiscal revenues. This is 45 days after their end of quarter. So basically what you are seeing the contribution to revenues in our fourth quarter is something they filled until the end of July of 2017. So there is a gap here in what we reported to you.

Second, regarding their effectiveness, I think they are becoming more and more engaged. We're seeing a mapping with accounts of the top 500 accounts. We're seeing more activity across the board and we're seeing them starting also some joint marketing companies. Together with that, I think there is a clear potential to increase the portfolio.

The fiscal sales from Radware and I believe that will happen also relatively quickly in 2018. All-in-all, we're seeing increased activity. We're seeing wins across the board. I cannot speak regarding attach rate because I don't have the fiscal sales statistic and they don't share it with us.

But our pipelines are growing, activities are growing, the strategic nature is increasing and we're starting to recognize every quarter, more and more revenues from this relationship..

Got it. Great, thank you..

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

Thank you. I guess just another follow-up question on these OEM relationships. If you could go back into though – you talked about two of them participating and the one that was announced today. How does that – is that they introduced selling your own product, does that I mean selling their product.

Can you talk about the scope of what that – of how that relationship want and what that means in terms of the success of the relationship as you look at it? And then just on this deferred revenue recognition, is this the royalty and does this have any impact on a new accounting rule for the adoption of the accounting on that new?.

Okay, so regarding the OEM relationships in this specific Telecom Group, we worked on it for several years. But one OEM introduced as to a new operating unit that we didn't have a relationship with and we were able to leverage some of the other work we’ve done with the global group to close that as well.

And the other worked with us on a major opportunity in that carrier. So we're seeing them introducing us to new operating unit, new customers, as well as jointly working with us from the core opportunities. In that Telecom Group we sold our solutions because there was a clear need for very high capacity need us mitigation solutions..

As for the OEM Joseph, we decide fiscal that Roy mentioned how we recognized it’s only one-time royalty of 45 days after Q end. All other sales are completed to be all for revenue within the 606 will not change this trend significantly for growth..

Okay. And then if I look at the relative growth rates, just given that with the visibility on the 8% to 10%.

Can you give us some feeling of how much – what the growth rate of security related spend is versus that 8% to 10% or the cloud growth relative to the 8% to 10% in terms of how we think about the components of growth?.

Yes. So obviously, I mentioned that security cloud and subscriptions are doing exceptionally well for us. You should assume they are growing much faster than the 8% to 10%..

Okay. Thank you..

Your next question comes from Michael Kim from Imperial Capital. Please go ahead..

Hi, guys.

Could you talk a little bit about maybe some of the differences in your geographies, America is obviously very strong, but EMEA and APAC both a little on flatter? Are you seeing some dividend in sales productivity or that primarily a driver of mix?.

I think from our booking point of view, we are seeing also our greatest strengths starting to happen also in the international. We’re very satisfied with our EMEA performance in Q4, but in our model, some of it is obviously deferred and you are going to see probably in 2018.

So I think we are starting to see the strength going also internationally, especially as they are becoming more alert to security issues. Europe is now a new type of compliance coming in as well as they are more open to cloud environment, we’ve seen that in APAC, we’ve seen that in EMEA in the second half of 2017.

So we feel very good about the prospects also in the international markets. I mentioned some of the growth in our cloud security capacity and presence across the – some of those investments were made either directly also our partners in the international market..

Got it. And then just on the growth in product subscriptions and cloud solution.

Are you seeing – I think you call out a number of new logos, are you seeing maybe a shift in higher growth from the new customers versus expansion with exciting and did you see consistent renewal rate?.

So we saw consistent renewal rate, regarding growth, obviously the bulk of our revenue is still coming from our existing customers and that’s the growth engine. What we are seeing is the pick up in number of new customers and some of it organically I would call by our own salesperson, some of it and in bigger numbers now driven by our OEM partner.

So we definitely see at this point our OEM partners including us or increasing our footprint in the market and now we are building campaigns obviously to leverage that growth in those new customers to a complete Radware offering.

So we are seeing another layer of potential business that we can do through those OEMs by leveraging the lands and expense strategy so to speak..

Got it.

And just lastly on a high level, do you have a revenue mix between products and services for the full-year 2017?.

Yes. We will mention it in our [2018], we will publish soon..

Okay. Great. I’ll look for that. Thank you very much..

Thank you. End of Q&A.

There are no further questions at this time. I will turn the call back over to the presenters..

Okay. Thank you. I would like to thank everyone for joining us and have a great day. Thank you..

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