Welcome to the Radware Conference Call discussing Third Quarter 2022 Results and thank you all for holding. 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] As a reminder, this conference is being recorded, November 2, 2022.

I would now like to turn this call over to Yisca Erez, Director, Investor Relations at Radware. Please go ahead..

Thank you, Dinesh. Good morning, everyone, and welcome to Radware's third quarter 2022 earnings conference call. Joining me today are Roy Zisapel, President and Chief Executive Officer; and Guy Avidan, 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 risk 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 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 and furnishes from time to time with the SEC, specifically the company's last annual report on Form 20-F as filed on April 11, 2022. 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.

I will now turn the call to Roy Zisapel..

Thank you, Yisca, and thank you all for joining us today. During the last few weeks of the third quarter, we saw closing delays in some customer deals and an increase in multi phased contracts, in response to macroeconomic headwinds. These trends expanded globally and impacted our revenue, which came in below the low end of our guidance.

We expect this environment to continue to impact our business in the short term. We continue to track the deals that did not close and at this point, we are not aware that any has been lost to competition.

We remain confident in our market position and competitiveness as evidenced by the continued wins we are seeing in large enterprises across all regions. We have a healthy pipeline and we see strong activity level among customers and prospects, which continue to be driven by a significant increase in cyber-attacks.

Given that, we're taking several measures to manage the business and leverage opportunities that will position Radware for long-term success. First, we will continue to focus on and cater to the large enterprise market with our state-of-the-art protection.

We believe the current environment and spending behavior are temporary and expect to see strong demand from larger enterprises in the future. We believe there are significant opportunities in the market even if the deals take more time to mature.

For example, during the third quarter, we closed a multimillion dollar application security deal with a Fortune 500 SaaS company. We won the deal based on our strong partnership and unique application security capabilities.

Other examples of large enterprise wins includes a new logo deal with a leading service provider in Latin America for our complete cloud security offering. Our frictionless approach to security was crucial to this customer in protecting the complex environment. In partnership with Cisco, we also closed another new logo deal with a major U.S.

financial services company to provide hybrid cloud DDoS protection. We displaced the incumbent who could not provide the level of visibility and protection that the customer needed. The second measure we are taking is to increase our investment in cloud security and shift resources to our cloud growth initiatives.

In times of financial uncertainty and an increased threat landscape, cloud security can help customers boost their security without committing to larger upfront CapEx investments. In response to this market need, we are constantly expanding our global footprint by opening more cloud security centers.

During the third quarter, we opened two new centers in Dubai and Italy to expand our market share. For example, in the Emirates, several new customers already onboarded to the security center. One new logo from the financial sector found our cloud DDoS solution critical to comply with regulations.

Another new logo which is from the media sector moved from a private to public cloud and wanted to strengthen their application protection. The other new logo which we won jointly with Check Point was from the Education Center.

This customer bought our cloud while following the demonstration of our advanced capabilities and was convinced in Radware technology advantage, especially considering the local cloud center. The third step we're taking is reallocating resources to expand our footprint in the medium sized enterprise market.

The cybersecurity risks and needs of the mid-market are identical the needs of the large enterprise market. However, the capacity and skill talent that mid-market companies have to manage their security environments are more limited.

Our fully managed cloud security services are a great fit for this market as evidenced by the significant number of medium sized enterprises that are choosing our cloud application security offering.

To leverage this opportunity, we are targeting mid-market security needs by expanding our channel relationships and offering cyber protections through our cloud first approach. And lastly, we're taking measures to fine tune our operational expenses to ensure our business is profitable with strong positive cash flow from operations.

This includes reallocating internal resources to focus on cloud growth initiatives and making focused investments on long term growth opportunities that we expect will lead to better returns. As we look at the state of the cybersecurity landscape, we believe there are several market forces playing to our advantage.

First, the number and level of sophistication DDoS, WAF and bot attacks continue to increase. [indiscernible] are relentless. Organizations will continue to invest in protecting the critical applications and infrastructure and we believe hardware has the right offering to ensure the best protections for them.

In fact, in the third quarter, Gartner recognized Radware for its application security solution. In its critical capabilities report, Gartner once again ranked Radware the number two solution out of 14 companies for API security and DevOp use cases as well as high security use case.

According to Gartner, Radware provides our best set of application security controls and offers one of the stronger API security offering on the WAF market. Second, companies continue to struggle to achieve consistent high quality application security.

According to our multi cloud application security reports, 70% of respondents are not confident in their ability to apply security across on-prem and multi-cloud platforms. And 64% said that they don’t trust the security offered by public cloud platforms.

In short, more organizations are looking to have a dedicated application security solution in the public cloud amid the that Radware is especially suited to meet. While these are challenging and uncertain times, I'd like to reiterate that the fundamentals underlying our business are strong.

Our company is healthy with a large and diversified customer base, and robust balance sheet with more than $400 million on hand. We continue to generate cash from operations, build our annuity business and invest in our cloud security footprint and capacity.

Although this quarter revenue fell below expectations, we expect to end the year with a record revenue. With cyberattacks increasing in complexity and gliding in sheer volume, we believe the need for our solutions and specifically real time protection of applications will remain strong.

As we continue to fight for the good guys in this cyber world, we are confident that Radware is on the right track and well positioned for long term growth. With that, I will now turn the call over to Guy..

Thank you, Roy, and good day, everyone. I'm pleased to provide analysis of our financial results and business performance for the third quarter of 2022 as well as our outlook for the fourth quarter of 2022. Before beginning the financial overview, I would like to remind you that unless otherwise indicated, all financial results are non-GAAP.

A full reconciliation of our results on a GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investors section of our website. Third quarter 2022 revenue declined 4% year-over-year to $70.5 million compared to $73.4 million in the same period of last year.

As Roy noted, we saw longer sales cycle as well as resizing in some of our large enterprise and carriers customers. As a result of macroeconomic headwind, which affected our revenues across all regions. Revenue in the Americas in the third quarter was $32.9 million, representing 8% decrease in Q3 2022 as compared to Q3 2021.

On a 12 trailing month basis, Americas revenue decreased by 1%. EMEA revenue in the third quarter was $22.2 million representing a decrease of 6% when compared to the same period of last year. On a 12 trailing month basis, our revenue grew by 18%.

APAC revenue increased by 10% to $15.5 million as compared to Q3 2021 and 3% increase on a trailing 12 month basis. In the third quarter, Americas accounted for 47% of total revenue. EMEA accounted for 31% of total revenue and APAC accounted for the remaining 22% of total revenue. I'll now discuss profit and expenses.

Gross margin in Q3 2022 was 82.9% compared to 82.6% in the same period in 2021, an expansion of 30 basis points. Our main gross margin improvement is related to the complete integration of Security-Dam, partially offset by higher costs related to recently launched cloud infrastructure coupled with lower revenue.

Operating expenses in the third quarter of 2022 were $53.2 million representing an increase of 9% as compared to the same period in 2021. Increases predominantly due to additional R&D headcount focused on our cloud and hawks initiatives. The full impact of Security-Dam integration and the increase in travel cost was COVID.

To improve profitability, we are reallocating internal resources as evidenced by headcount growth this quarter of only 1% compared to the second quarter. Compared to Q2 2022, operating expenses decreased by 2%, demonstrating our ability to manage our cost structure in a responsible manner and in accordance with the market environment.

We continue to strategically look at all aspects of our business and are adjusting our cost structure as needed. While internally reallocating resources to key growth initiatives and investing in long term programs that support our customers' need and will lead to long term growth.

Net income in Q3 2022 was $6.7 million as compared to $11 million in Q3 2021. Radware adjusted EBITDA for the third quarter was $7.3 million which include the negative $2.4 million impact on adjusted EBITDA of the Hawks Group. Decrease in the Hawks adjusted EBITDA is a result of increasing investment in R&D resources.

Earnings per share was $0.15 compared to $0.23 last year due to a low revenue in the quarter as compared to last year's revenue for the same period.

Despite a decline in revenue in the third quarter, we met our, a, earnings guidance, which is the testimony of our commitment to manage our expenses and our ability to navigate the company and generate cash even during challenging times. Turning to the balance sheet and cash flow items.

We generated $1.5 million in cash from operations during Q3 2022 as compared to $17.9 million during the same period of last year. Within the third quarter, we repurchased shares in the amount of approximately $6 million and we ended Q3 2022 with approximately $434 million in cash, bank deposit and marketable securities.

Our strong balance sheet provided us with great foundation to navigate in the current market conditions and volatility, while focusing on long term opportunities to drive profitable growth. During the third quarters, Radware Board of Directors has authorized an increase of $20 million buyback of the company's ordinary shares.

And as of today, the remaining approved buyback budget is $81 million. I'll conclude my remarks with guidance. Radware is a robust company with global team of professionals, a profitable business model based on critical cyber solution, a strong balance sheet and loyal customer base.

Moreover, RPO for the end of the third quarter grew versus the third quarter of last year and all of which give us the confidence in the fundamentals of our business.

As we said in previous call, while a challenging microenvironment posed some uncertainties on customer spending behavior, we expect cyber security demand to remain resilient in the long run. However, we're still witnessing protracted sales cycle and a growing preference for multi-phase deployment among large enterprise end carriers.

Therefore, which is to take prudent approach in the short term. We expect total revenue for the fourth quarter to be in the range of $73 million to $75 million. We expect our non-GAAP operating expenses to be between $54.5 million to $56 million.

Given all these trends and developments reviewed earlier, we anticipate Q4 2022 non-GAAP diluted net earnings per share to be between $0.16 and $0.19. I'll now turn the call over to the operator for questions.

Operator, please?.

[Operator Instructions] And your first question is from the line of George Notter with Jefferies. Please go ahead..

Hi, guys. Thanks very much. I guess one of the things that, that stuck out to me was the annual recurring revenue number. I think I'm looking at $195 million number. I think that's flat sequentially.

I assume there's some puts and takes in that number, but can you kind of talk about why that number was flat and you're not seeing growth in that area?.

Yeah. In the end, it's -- I would say, it's an outcome of the revenues. And I would say the missing revenues translate to that data ARR (ph). In general, we see continuous growth in cloud ARR and more challenging on the product and services side. But we believe obviously that this result is low and should improve in coming quarters.

That's also in line with our increased focus on cloud security that we believe will drive this figure upwards..

Got it. And I assume within that, I guess I assume the maintenance contracts that are inside that number that are on appliances or traditional hardware sales, is that the piece that's sort of softening and that's getting offset by cloud and products subscriptions and therefore you're getting to like a net flat sequential number.

Is that the dynamic that's going on here?.

That's correct. That’s exact. However, with that, we believe it should grow sequentially and of course, the overall yield.

So that is definitely in our model, but we believe that with heightened level of revenues plus even more focused on cloud security as we've noted in our prepared remarks that should drive faster growth of the cloud based to overshadow any decline if happening on the maintenance contract..

Got it. And then can you give us a cloud services and product subscription ARR growth number. I think last quarter you told us it was 18% year-on-year.

I'm just curious what that was this quarter?.

It was around 12%..

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

Your next question is from the line of Alex Henderson with Needham. Please go ahead..

Great. Thanks. So can you just talk about the -- I know it seems mundane, but obviously, you've got a very large cash balance and with interest rates going up, a 3 point increase in interest rates would add about $8 million here to your numbers, if once it's fully rolled through.

Can you talk a little bit about how you expect the interest income line to trend? Is the $2.4 million or $2.5 million (ph) in the third quarter, the run rate and how will it step up as interest rate benefits go through the balance sheet?.

Alex, so we expect more or less same income from interest in the coming quarter, $2.4 million, $2.5 million third quarter. We also mentioned in the prepared comments concerned that we will continue to do buyback. So we will use some of the cash for buyback..

So just mechanically, I mean, interest rates have gone up a lot more than 3% and probably be to go up another three quarters today in the U.S.

Can you talk about how that -- how you're structured against that? Are you maturities going to roll over the next three or four quarters? We'll have to have a little longer maturities on that those investments are disclosing some sense of it?.

Strategically, we're shifting to short term maturity. We are balancing between convertible bonds and investing in just putting the money in banks for six and 12 months, which currently yields even higher interest than bonds that actually feels in our investment policy. So we're shifting more towards short term now..

Okay. So looking out to next year, you're not going to get more -- a nice uptick in the interest income because it's a pretty big number. I mean, we're talking about again, on your cash and then short term investments, a 3 point swing which we've already seen is an $8 million change and it's not trivial.

So is that not going to step up $5 million, $6 million, $7 million in ‘23?.

Definitely, next year we expect that function in our income from interest. And obviously, it will grow as interest rate, even if interest rates will stay as it is today..

All right. We still have [Technical Difficulty].

[Multiple Speakers] in convertible bonds from the past..

What portion is variable?.

What do you mean variable?.

Well, we'll roll over the next three to six months..

Let's say about half is still based on, let's say, convertible bonds that still has lower interest rate..

Okay. Thank you. Going back to the competitive landscape, it does sound like EMEA is under a lot of pressure, pretty clear that conditions there are going to get worse over the next couple of quarters as winter comes in and the economies continue to decelerate.

So can you remind us a little bit just what your position is in terms of what portion is in EMEA is local currency base and what portion is priced in dollars?.

Revenue is all in dollars..

It's 100% in dollars?.

Yeah, close to 100%..

Okay.

And then going to the operational environment, can you talk about pipeline? And to what extent there's been an erosion in the pipeline or whether that's still robust and how are we set up as we go into the next couple of quarters given the pipeline generally is three, six, nine months kind of structure?.

So I would classify the pipeline is very robust. They're going to very close to record levels, if not at that level. And it's driven also by the delays in closing some deals.

So it's not only the creation that continues and depends on the region, might be more challenged or less challenged, but also because of delays of closing that obviously increases the current pipeline but overall pipeline is robust. A lot of activity deals that we think are maturing.

And as I've mentioned, we did not see competitive pressure or losses on the pipeline. So going forward, at least, trying to not to put aside the sales cycle or the lengthening sales cycle we feel very good about the pipeline..

One last question, when I see before the multi-phase deployment, how big an impact does that how does it, how does it manifest?.

I'll give you an example of an expected carrier deal that we had for mobile protection. Initially they were talking about doing 30 MAX (ph) in one shot around $3.5 million product deal.

They ended up with saying, okay, we'll do 10 MAX first, one-third, the next year as we deploy the MAX, et cetera, we will do another one and maybe towards the end of the year or the another thing. So they are -- because of supply chain budgets, whatever they are phasing their own deployments and they're phasing our orders.

So in that case, a product deal that's generally create immediate impact on revenues, of course, for us, immediate recognition is moving from $3.5 million to $1.2 million..

I see. Thank you..

Your next question is from the line of Tim Horan with Oppenheimer. Please go ahead..

Thank you. I think said some large customers are resizing. I'm assuming they're grooming or trying to cut their expenses.

Can you elaborate on that a little bit more?.

Yeah, I think. So first, I just gave an example of those phasing, et cetera. We are seeing, for example, customers that instead of taking the full cloud security solution at one shot, they're trying to stage it for cloud, and then some appliances et cetera. We were used to, I would say get all of that in one piece.

So it has different shapes and forms, but budget allocation, more lengthening sales and approvals, cycles, all of that we see either of the whole deal pushed or some of the deal getting booked and then delayed. Now we don't see it across the board.

We see it in very large deals, the regular mid-sized deals or even medium to large, we did not maybe yet, but we did not experience that. But on the larger commits, in the very large enterprises or areas, that's where we see this phenomena..

Yes.

Well, are you seeing existing customers? Are they maybe reducing spend on some of their like or are they trying to reduce what they're spending with you now for existing customers on either legacy products, not new customers existing?.

We see that also in large existing ones. For example, the example I gave from the carrier, it's an existing large customer of value, the deployment towards 5G is new. But over there, we do see that phenomena..

Got you.

So any idea how long the slowdown can last year, can companies go two years without really investing? Is it two quarter phenomenon, what do you kind of expect on the timing?.

So I would split it to where we are thought of a new infrastructure build and then it might be on the long side because it depends on their plans for a new data center or deploying of 5G, et cetera, et cetera. And then I would say, we are aligned to other overall business environment and investment capability, so that's one end.

On the other end, when it's serving existing infrastructure and existing business, I don't think it can be delayed too much because the hackers and the cyber activity is there.

So you can delay budget, you can try to resize it or to fit more your current needs versus buying for three years ahead of time, et cetera, et cetera, but the investment you would need to make otherwise it would be vulnerable.

So I think the heightened cyber activity levels would actually accelerate budget spend in our areas, as long as it belongs to existing infrastructure, existing applications, et cetera, I think it's hard to delay too long..

And lastly, I know you haven't lost any deals, but have you seen a step up in activity on the competitive front either from hyperscalers or any other competitors?.

No, no. I think we're doing quite well on the competitive landscape actually. I know it does not show in the current quarter numbers, but in general, we've seen especially in cloud our win ratios going up in the last three, four quarters. So we feel good about the competitive positioning.

I mentioned Gartner report, we have other reports attesting to the same and very strong customer references in Gartner, [indiscernible] et cetera. So on all the competitive front, we feel good. We do need to take the steps we've mentioned going more cloud, strengthening the mid-market to accelerate our growth..

Thank you..

At this time, there are no further questions. I will now turn the call over to Roy for any closing comments..

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

This does conclude today's conference call. Thank you all for joining. You may now disconnect..