Ladies and gentlemen, thank you for standing by and welcome to the Radware Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] I'd now like to hand the conference over to Anat Earon-Heilborn, VP-Investor Relations. Please go ahead..

Thank you, Sharon. Good morning, everyone, and welcome to Radware's third quarter 2020 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 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.

These forward-looking statements are subject to various risks and uncertainties, and actual results could differ materially from Radware's current forecast and estimates.

Factors that could cause or contribute to such differences include, but are not limited to, impact from the COVID-19 pandemic, general business conditions, and our ability to address changes in our industry, changes in demand for products, the timing, 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 or furnishes from time to time with the SEC, specifically the company's last annual report on Form 20-F as filed on April 2, 2020. We undertake no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date of such statement is made.

Please note that management will virtually participate in the Berenberg CEO Conference and the Needham Network & Security Conference in November and in the Raymond James Technology Conference in December. I will now turn the call to Roy Zisapel..

Thank you, Anat. We're pleased to deliver another quarter of solid results. We enjoyed strong broad-based booking growth, spanning across all our geographic regions and product lines and across all components of our data center and application security offerings, DDoS, web application firewall, bot management and cloud workload protection.

As a result, our book-to-bill was above one and we benefit from increasing visibility for the coming quarters, despite the obvious challenges in the business environment. With regards to our cloud solution and product subscriptions, we saw continuous robust performance. This is reflected in our year-over-year ARR growth.

For the third quarter, ARR reached $169 million, with growth rate accelerating to 12%, up from 10% in Q2. The main driver for this growth was cloud and product subscription ARR, which grew approximately 30% year-over-year. The digital transformation is accelerating. The users move to work from home, utilizing personal computers and mobile devices.

At the same time, applications are moving more quickly to the cloud. These trends create an expanded attack surface. On the backdrop of this phenomena, the attack landscape continues to be very active, and traffic through our cloud security infrastructure reach all-time highs.

In the third quarter, the number of DDoS attacks blocked by us was more than two and a half times larger than in the second quarter. And the volume of DDoS attacks blocked more than doubled. The total number of web application attacks blocked in the third quarter, increased approximately 40% sequentially over Q2.

These extensive level of attacks illustrate the need for a comprehensive security strategy that protects and secures the infrastructure and critical business applications, whether they are on-premise, in the cloud or operating in a hybrid environment.

This increased needs for holistic security portfolio that has provided us with opportunities to expand our presence with existing customers, as well as winning new business. For example, during August, a large scale ransom attack forced the stock exchange, which was not a Radware customer at the time to halt trading for three days.

Despite being protected by a competing Cloud DDoS solution, the service failed to stop certain attack vectors. We deployed our DefensePro Attack Mitigation appliances in a very short time and the attack traffic was immediately blocked. As a result, we secured an order early in Q4 through our strategic partner, Cisco.

We are addressing this increased demand by further investing in our own infrastructure and operations. As we announced in late August, we recently added three new scrubbing centers in India, Brazil, and Israel, expanding both our geographic coverage and our total capacity.

We also expanded and enhanced our main security operations center, tripling its size and equipping it with state-of-the-art monitoring and control systems. We continue to broaden our offering to deliver on our vision of a highly differentiated full stack application security offering, utilizing advanced algorithms across our portfolio.

In June, we announced API protection capabilities, applying machine learning on API calls and providing us with a highly differentiated capability. Recently, we announced that we developed a new set of behavioral algorithms to protect against sophisticated attacks in online gaming.

This meet the specific needs of this sector for protection from UDP attacks, which is the core protocol used in these applications. We believe our investment in algorithms continues to provide us with significant competitive differentiation for the effectiveness and accuracy of our security solutions. Moving to the customers and sales front.

In the third quarter, we saw several multimillion, multi-solution cloud security deals, including a major win with an online trading platform we announced last month. Our OEM relationship continued to perform well and delivered record booking for the quarter. We continue to win new customers through these relationships, including Fortune 500 levels.

One such win was with a Fortune 50 leading healthcare company that selected to displace its existing security solution with Radware Cloud DDoS Protection Services across six data centers globally. Last month, we announced our new reseller relationship with Airtel, India’s largest integrated telco.

Airtel is now offering Radware Cloud DDoS Protection, Cloud WAF and Bot Manager cloud security services to its enterprise customers. Under this agreement, we've already secured our first joint deal and we're looking forward to securing many more.

In summary, while the level of macro-uncertainty is high, our visibility continues to increase, supported by increased backlog and accelerating ARR growth. With the rapidly accelerated digital transformation, cloud migration and remote workers initiatives, the attack surface has expanded in cyber activity is at all time high.

Our comprehensive and differentiated data center security offering addresses the critical business need for continuous data center in application security and delivery. Our focus on large enterprises and carrier segments in leveraging our key strategic partners’ market access creates for us a robust market demand for our solutions.

All these position us very well for the future. I will now turn the call to Doron..

Thank you, Roy. We are pleased with the results of the quarter, which were achieved in an environment that continues to be challenging with countries and regions going in and out of lockdown for other limitations leading to continued uncertainty. Our organization continues to perform well under these circumstances across all functions.

And we are pleased with the way our employees adapted to the operational and business environment. Revenue for the third quarter were $62.5 million, 1% below Q3 2019 and in line with our guidance. From a geographic perspective, revenues from the Americas reflected an healthy demand environment.

Q3 Americas revenues increased 24% from last year to $30.2 million, and nine months Americas revenues increased 13%. Revenues from the EMEA region decreased 5% from Q3 last year to $18.3 million, and nine months revenues decreased 1%. Revenues on Asia Pacific decreased 27% from last year to $14 million and for the nine months period decreased 25%.

Our cloud and product subscription revenues together with maintenance revenues comprised our recurring revenue. In Q3 recurring revenues were 63% of total revenues, reflecting high product delivery. For the first nine months of 2020, recurring revenues were 66% of total revenues compared to 64% in the first nine months of 2019.

ARR, which normalizes timing differences in bookings, invoicing and revenue recognition reached a record $169 million for September 20, increasing 12% over September 19. This growth represents the host of our online performance.

Within the portfolio cloud services and products subscriptions, grew approximately 30% year-over-year, reflecting the growth drivers for the quarter. The total deferred revenues balance was approximately $172 million. Out of the total balance 63% or approximately $108 million is used for recognition in the next 12 months.

We have been providing total deferred revenues in the past few years as the leading indicator for future growth. We believe that ARR is more industry standard indicator that is more appropriate, given the increased proportion of subscription revenues and the decreasing proportion of appliance sales.

We will therefore stop discussing total deferred revenue starting the next quarter, and we’ll regularly provide the ARR information. I will now discuss expenses and profit all in non-GAAP terms. The differences between the GAAP and non-GAAP results for the quarter are detailed in our press release.

Gross margin for the third quarter was 82.2% reflecting product mix and higher proportion of subscriptions. Let me remind you that our cloud subscriptions are actual services that are accompanied by costs, especially when we open new scrubbing centers or increasing capacity across our cloud network.

Operating expenses in Q3 were $44.5 million, up 3% from Q3 2019. The majority of the increase is a result of higher highs headcount expenses, including commissions offset predominantly by lower travel expenses. We ended the quarter with 1,125 employees, up by 54 employees compared to a year ago.

Operating profit end margin in Q3 2020 were $6.9 million and 11% respectively. Net income for the third quarter was $8.4 million or $0.18 per diluted share at the high end of our guidance. Turning now to the balance sheet and cash flow items.

Net cash provided by operating activities was $7 million for the third quarter and $50 million for the last 12 months. During the quarter we repurchased approximately 626,000 shares for a total of approximately $16 million. In the first nine months of the year, we spent approximately $40 million on share buybacks.

And as of the end of September, we had approximately $36 million available for continued purchasing. We ended the quarter with approximately $437 million in cash and financial investments. Most of our cash is invested in highly liquid U.S. dollar, marketable securities and deposits. I will move to our guidance for the fourth quarter of 2020.

We expect Q4 revenues to be between $66 million and $69 millions, leading full year revenues to be between $247 million and $250 million. Q4 operating expenses are expected to be between $46 million and $47 million. We expect to see a continued impact of higher headcount cost partially offset by lower travel expenses.

In addition, Q4, we factor a moderate FX impact. Although our financial income for Q3 2020 reflects a favorable investment portfolio performance, we expect a decline in the coming quarters even lower yield on new marketable securities. We expect EPS for Q4 to be between $0.21 and $0.24 and full year EPS to be between $0.65 and $0.68 cents.

I will now open the call for Q&A..

[Operator Instructions] First question comes from George Notter with Jefferies..

Hi there. Thanks very much guys. I guess I wanted to ask about the differential in growth rates, across your Americas business. I think it's in 24% year-on-year, obviously APAC was worse, EMEA was in the middle. I know you guys are investing fairly aggressively in North America in particular.

And can you talk about those investments and how they're translating into the additional revenue growth? And does this kind of open your minds to investing more aggressively in other parts of the business as well? Any thoughts there would be great, appreciated..

So I think in general, obviously we're very satisfied with our performance in North America. I think the investments that we've done and we shared in the – already in February of EBIT, and that coupled also with the U.S.

at least from our point of view, we'll see less on the business side from COVID-19 versus what we've seen internationally lock downs and the way also the other governments reacted on the business side.

I think also in the U.S., the investments in cyber security and cloud are in a heightened level and they've accelerated significantly, which also contributes nicely due to our performance.

So our plan is to continue to increase investments in North America, given the goals and given that we think the potential for us is extremely high, almost unlimited versus where we are now. And we're planning to add more resources across both our direct salesforce, our OEM channels and the cloud reselling.

So across all the growth drivers we're sharing this part of our strategy. As it relates to the international, I've mentioned in our detailed comments. In Q3, we already saw all our geographies growing, geographies in bookings. It's not yet in revenues, but obviously this trend will continue into Q4.

It will start to – you will start seeing that also in the P&L. So as long as the business climate in the international market stays as it, we're also optimistic that our performance there will improve..

Next question comes from Alex Henderson with Needham..

Great. Thank you very much. I was hoping you could talk a little bit about the U.S. business split between what I think is probably some strength at Cisco and whether that is part of what drove the acceleration and whether – how much is more organic Radware? And I've got some follow-ups..

Yes. So the growth in the U.S. not only in the third quarter, but throughout the year, definitely we're seeing Cisco ramping up significantly as mentioned probably every quarter. I want also to highlight the checkpoint relationship, another record booking a quarter from Checkpoint. As I've mentioned, it was a record booking quarter for all OEMs.

So that is helping us, but a lot of the growth is coming also from our organic wins though. So it's really the fruits of all the strategy taking place. And as I've mentioned, we are very satisfied with the results and believe we should put more resources behind it to continue..

On the Cisco front, do you think the 7% risk that they are doing will help you or hurt you as the company shifts resources and shifts focus? Any sense of whether that's a tailwind or a headwind?.

Yes. So early to say, but definitely the direction they're taking, the high level strategy to focus more on applications and more on security should help us, because this is exactly the area we focus on and where we are completely complimentary to their portfolio.

So the high level strategy, I think fits us very well, we need to see how the reef in affects their performance. But again, our ability to – our number in Cisco can grow significantly, the potential is huge.

And we're starting to win as I’ve mentioned in my comments more and more Fortune 100, Fortune 50, Fortune 500 customers with them as we're seeing increased activity with their salesforce..

Great. If I could ask one last question, and then I'll see the floor. I know you don't want to give guidance past the current quarter, but strategically the logic behind your spending in growth outlook into 2021, it seems pretty clear that you had intended to accelerate spending in 2020, because of COVID slowed at somewhat.

I would assume that you will see an acceleration in investment in – as we go into 2021. And then I also see some TNE coming back.

So should we be expect the OpEx growth in 2021 to put a little bit of a crimp on the operating margins in that year? Or should we assume that you're going to be as you've historically been more careful on the mechanics, severe investments, so that you continue to deliver some margin rebound?.

Yes. So while I think we will continue to be conservative on investments, I think, especially in North America, and especially as it relates to our OEMs and cloud security offerings, it's the time to continue to invest.

So we don't give guidance yet on all those parameters you've mentioned, but directionally OpEx will grow, especially in these areas, in these investments, because we see very good returns, I think ARR is a good directional parameter to follow. And we want to put more support behind these growth..

Thank you very much..

Next question comes from Yi Fu Lee with Oppenheimer..

Thanks for taking my question and hope everybody is safe and healthy. Roy, can I just ask, maybe start with you first, a more broad-based macro question.

We've seen Americas grown fairly healthy at 24% year-over-year, but can you give us more color? Were there any pull-forward from the June lockdown we’ve seen with other vendors in America? And also some commentary Roy, on maybe the EMEA because we're hearing second wave lockdown in let's say the UK? And also anything on the timing of APAC? And then I have a quick follow-up with – for Doron as well..

Yes. Can you just repeat your question on the U.S., whether there were….

Yes. Were there any pull-through from the June lockdown? Because we've seen other vendors that in late June in America, like some States like California there were like lockdown – extended lockdown measures I would say in June.

Were there any pull-throughs from the second quarter through the third quarters in a macro that drove the very healthy year-over-year increase? And maybe some commentary on the EMEA and APAC region would be helpful, Roy..

Okay. So nothing specific that I can share in also in our last quarterly result, it's not that we mentioned slip deals in North America. North America performance for us for several quarters now has been strong and we continue to see very good levels of activity and win ratio coming from that.

Regarding EMEA and APAC, over there, the situation is a bit more complex, as different countries behave differently. And also forecasts in these countries are changing quite dynamically as they move to second wave, third wave, new lockdowns and so on.

I'm sure you follow the news from Europe in the past several weeks, which makes all the environment obviously less strong for us. Having said that, in Q3 and also our expectations for Q4 are quite good in the international theater as well.

So we do see rebound of business activity and to the point it will persist more than one quarter, maybe two or three quarters, it's definitely going to flow into the P&L. So I don't see any worsening conditions internationally, actually in Q3, we saw very good improvement.

And we're looking forward to go back to previous business levels and beyond there as well..

Excellent commentary, Roy. And then Doron, can I just follow-up with the investments and the expansion of the scrubbing centers in particular, the India – emerging markets like India, Brazil, and the dealer markets in Israel.

Can you give us a little colors on some of the greenfield opportunities in the emerging markets? And was Airtel partnership a big contribution to the performance in some of these regions? Anything on that would be helpful. Thanks Doron..

So I'll take that on the customer side, and then maybe Doron will add some comments. So first on customers, what we see with some of our global customers is we need to cover, as I’ve mentioned, many data centers across the world, when we take a global Fortune 50 or a very large manufacturing company and protect all the facilities.

In many cases, they do have additional data centers in countries, such as Brazil and operations in India. And then our ability to serve them also locally is of significant competitive advantage. So the opening of these additional data centers is coming from two directions.

One, of course, we want to serve the local market and in many local markets today, taking data and user private information out of the country is not allowed by the regulators. So, especially as it relates to local government, financial institutions and so on, you do need local facilities.

In addition, the global companies, when we are signing global deals, it's becoming more and more needed and a competitive advantage to have that global presence. And we've acted based on that. So both to our India and Brazil data centers, we already have tenants based on these two.

Specifically to India, we are also extremely encouraged by the Airtel partnership. We became their solution for Cloud DDoS, Cloud WAF, Cloud Bot. And if you follow their announcements, they announced a new theme. They call Airtel Secure, in the main two strategic partners, Cisco and Radware, as part of this strategy.

Airtel is the largest business in telco in India. They have very high plans in terms of security, overall in cloud security specifically. And we are very enthusiastic about this partnership, and we will update you in the coming quarters about our progress. And I think its material to our APAC business..

Thank you very much, Roy..

Next question comes from Andrew King with Colliers Securities..

Thanks for taking my question.

So with the approach in holidays deal, that’s why we get an idea of where you see the opportunity with the bot attacks, especially with you just announcing the Bot Manager for Salesforce Commerce Cloud?.

Presenters, you're connected..

Okay.

Can we get the additional questions?.

Mr. King, please repeat your question..

Yes.

So just with the approach in holidays dealing, can you guys give us a little bit more color around the opportunity with the Bot Manager and the bot attack, especially with you guys just announcing the Bot Manager for Salesforce Commerce Cloud?.

Yes. So, [Audio Dip] space in general is targeting those automatic robots that are imitating real user traffic. In that sense, they are expanding our security portfolio and the problems we solved, to more business related problems like account takeover, like page scraping and so on.

The attacks that we're seeing in the bot space are not – the traffic itself is not malicious. It's the intent that is malicious. And hence, the conversation are expanding those security and business or application business logic conversation.

We're seeing very nice uptick for our customers with WAF and DDoS, buying also those additional bot capabilities from us. We think that our product, which is again, based on machine learning and algorithms is doing extremely well. And we think that opportunity will just grow within the coming years, the market is still small, but growing quickly.

And it will tie both to web application security as well as to API security. So definitely, we are – we're satisfied with our position and the growth we're seeing in that area of our business..

Great. And then just looking at the OEM space, specifically in the past, you've really been focusing your investment into the Cisco relationship.

Can you give us the idea of going forward if you're going to shift more of those resources and investments into the Nokia and Checkpoint relationship, or will you stay focused on Cisco?.

So, based on the results we're seeing, and I've mentioned several quarters in a row to the other OEMs, we continue to add investments both to Cisco, to Checkpoint and to Nokia. So we don't see those are mutually exclusive investments.

Actually, we see Cisco and Checkpoint relationship and the end customers quite complimentary for us because generally when Cisco Security is the large security architecture player in a customer, it means that Checkpoint plays a smaller role and vice versa.

So generally, if you look on the Fortune 500, many of them would be either or, I know the two vendors together, and therefore we can invest in parallel in both relationships and enjoy growth with them in the – and getting better access to the end customers..

Got it. Thank you..

Next question comes from Tavy Rosner with Barclays..

Hi, this is Chris Reimer on for Tavy. Thank you for taking my questions. I wanted to ask, following on the previous question relating to geographies, especially the decline in APAC.

Can you clarify if you're seeing some long-term trends there or is it all just near-term volatility?.

We think from a booking perspective, this year would be growth over last year. So as it relates to our booking, and I do see already an improvement, we did suffer in the – I would say in the first half of the year, and especially in Q1.

I would say more, but since then we do see recovery, not in all the countries yet, but in the – I would say, in the major markets we do see and business is coming back. So I don't see that there's a long-term issue. And we look forward to bring back growth also in the P&L from the revenue recognition in APAC soon..

Okay.

And just regarding your cash position over $400 million, can you give any color or do you have any views on M&A?.

Yes. So we continue to be active in the market, looking for M&A, especially as it relates to enterprise security and cloud security spaces. And we will update when we will have something specific to report, but it's definitely one of the pillars of our strategy.

We think there's a good opportunity beyond the organic growth to add to M&A and we are looking for that. In parallel to that, you can see that we’ve heightened our buyback than this year to $60 million so basically 100% of the operating cash flow and a bit more of that we're utilizing for these buybacks..

Okay. That's helpful. Thank you very much..

Next question comes from Joshua Tilton with Berenberg..

Hi guys. Thanks for taking my question. Just a quick one and apologies, I didn't catch this.

Can you just repeat what the recurring revenue as a percentage of total revenue was in the quarter and what it was in Q3 last year?.

So in this quarter, recurring revenues was 62%, on first nine months, it's a 66% up from 64% from last year..

So the 64% was for the first time last year, that's on the first nine months or just in the quarter, I just want to clarify..

Yes, so first nine months was 64% and now up to 66%..

Okay. That was helpful.

Did you – by any chance, did you disclose what the percentage in the quarter was last year?.

Last year, it was around 66% to 67%. But overall, we mentioned that this year we are planning to get more than 65%, it’s a fluctuated issue. I mentioned in my prepared comments that we have the certain large deals that – with higher product component. So it drove the RevRec to be in this area of 62%.

So this is why we obviously get the – nine months and moving to the obvious trend on top of the period, obviously 42% and now we have been able to do more than 65%. This particular quarter, we have been bounded again because of this few deals with the product mix that dropped this trend..

That was very helpful. Thanks for the clarity..

And at this time, I'll turn the call over to Mr. Zisapel..

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

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