Ladies and gentlemen, thank you for standing by and welcome to the Radware Q4 2014 Earnings Conference Call. Before the conference all the participants are in a listen-only mode there will be an opportunity for your questions, instructions will be given at that time. [Operator Instructions] As a reminder today’s call is being recorded. I’ll turn the conference now over to the President and Chief Executive Officer Mr. Roy Zisapel. Please go ahead, sir.

Thank you. Good morning everyone, and welcome to Radware's fourth quarter 2014 earnings conference call. Joining me today is Meir Moshe our Chief Financial Officer. Meir will start the call by reviewing the financial results and afterwards, I'll discuss the business highlights of the fourth quarter results. After my comments, we'll open the discussion for Q&A. Meir?

Thank you, Roy and welcome everyone to our fourth quarter conference call. First, I would like to review the safe harbor language. During the course of this conference 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 such statements are just predictions and that 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 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 Securities and Exchange Commission, specifically the company’s last Form 20-F filed in March 2014. And now, ladies and gentlemen, for the financials. We are very pleased to report an additional record quarter and additional record year of revenues and results, as well as continued improvement in gross margin, operating profit and EPS. Revenues for the fourth quarter totaled to a record of $61 million, representing 7% sequential growth and 15% year-over-year. Revenues for 2014 totalled to a record of $222 million, an increase of 15% compared to revenues of $193 million in 2013. At the same time, short-term and long-term deferred revenues increased by $8.6 million from $58.7 million to $67.3 million. Non-GAAP gross margin remained at 83% in the fourth quarter contributing to increase in our annual 2014 gross margin towards 83%. Non-GAAP operating expenses reached $37 million in this fourth quarter then we have our non-GAAP operating margins to 22% in the fourth quarter and emphasizing our leveraged business model. The non-GAAP net income this quarter totalled to a record of $13.1 million or $0.28…

Thank you, Meir. Our Q4 results reflect the strong finish of the year with solid demand across both our cyber security and application delivery solutions. We are specifically very happy with the broad-based demand for our security solutions, where more and more customers are deploying a comprehensive Radware security solution including data center protection, application security and cloud security services. During the quarter, we continued to see strong performance from our North American region. Our U.S. business continued to deliver very solid year-over-year growth. We see significant opportunities in carriers, large enterprises, and cloud providers all in need for better security, better response time for hosted and centralized web applications, and better availability of the mission-critical applications. In addition, we saw improvement in our international business in 2014. Both our APAC and EMEA region were growing although we expect the stronger growth rates from these regions going forward. In the application delivery market, we released two high scale application delivery controllers for mobile carriers and high-end enterprise data centers. Our new Alteon 8420 is a 160 gig ADC appliance that provides industry leading consolidation ratios and VADC instances. With over a 100 VADC instances, it allows our carrier and cloud customers to drive multi tendency and consolidation to a whole new level, improving their application SLA and agility. In addition, we released an industry first in VADC. This network carriers and enterprise data centers seek to reduce their CapEx and OpEx as well as accelerated deployment of new network and web services. These organizations are working to standardize the virtualization of the network functions through an industry standard called NFV. The Alteon VA for NFV is a software ADC for NFV environment. Beyond being the only NFV solution in the market, it is by far the industry fastest software ADC…

[Operator Instructions] And our first question is from the line of Mark Sue with RBC Capital Markets. Please go ahead.

Thank you. Gentlemen, perhaps your discussion on just how you feel about the pipeline as we start the new era, as the DDoS guys [ph] they are also expanding particularly as the period leads the efforts and just kind of also separately jest your partnerships and how that’s helping as well? Thank you.

Okay, thanks, Mark. So we are starting the year with – as far as we see a very strong pipeline, by the way I would say worldwide not only in North America. Definitely recent security events across the world including these in France or the – what happened around the Sony, and The Interview movie et cetera are driving a lot of projects, a lot of interest, a lot of potential from organization across the world. Regarding partnerships, I think we continue to execute well and advancing, we were just announced this first week, an integration with Cisco ACI that is being presented in the Cisco Live and [ph] Milan. So we’re definitely seeing progress across data center partners, security partners, cloud partners and we are very optimistic on that.

That’s helpful. And Roy, just on partnerships with teams that are F5, A-10 and now you have a partnership with Cisco. How should we think about differentiation there end market customers or how it would be [Indiscernible] partner opportunity? And then separately, if we think about the opportunity in terms of the pricing dynamics, has that changed? There’s been lower pricing change for example A-10 have led that F5 fixed on their good, better, best, what does that need from a change from a pricing point of view for Radware going forward?

Okay. I think there is a differentiation in the marketing partnerships. There are some partners that are working like you’ve mentioned the Cisco ACI with a broad set of ADC partners and our partners that are choosing a much more specific and may be more strategic integration in terms of product or solution integration. So I think overall you can see, maybe our reliance with Check Point that’s one type of partnership, the Cisco ACI maybe it’s a different type, but all of them together are obviously assisting us in expanding our footprint both at the customer level and in the channel level and you should expect different forms of partnerships going forward. Regarding the pricing in the industry, we don’t see a major change, we actually feel very good where we sit now in terms of cost performance, especially with the high-end platforms we’re pushing that’s in the envelop in the market. In addition we have the NG and the NG plus packages that include multiple services on Radware on top of the ADC. And we are seeing actually a lot of interest from customers, an initial subscription buy from them, so we are actually seeing and it’s evident in our gross margin that we’ve seen in the second half of 2013 [ph] actually an upside in the gross margin versus our historical model.

That’s helpful. Thank you and good luck gentlemen.

Our next question from the line of Alex Henderson with Needham & Company. Please go ahead.

Thank you very much. Roy, a couple of questions, one, could you talk a little bit about the impact of the move to more of a subscription model what’s your book-to-bill on subscription looks like in the quarter and what you’re experiencing in terms of the subscription and security business impacting the ADC mark, [Indiscernible] business and vice-versa?

Okay. So we continue to see obviously very strong subscription booking in comparison to the actual revenues, we are recording every quarter. We are now also starting to enjoy booking of subscription on top of our ADC, especially as they relate to the web application firewall, the application performance monitoring, the fast acceleration. And so on. And we are also seeing projects that are combining our ADC and the attack mitigation solution to one comprehensive architecture in that regard not only that we enjoyed product subscription for both our security and ADC offering, but we’re starting to see more and more cloud subscriptions for DDoS, we now launched the WAF cloud, we have the acceleration cloud service. So definitely this year, we are putting a lot of emphasis in growing, the subscription booking going forward and so far, so good.

So, is the subscription actually causing an increase in hardware purchases?

I would not say it causing today an increase in the hardware purchases, time will tell regarding the ADC whether it will push faster and upgrade cycle to our Alteon NG versus I would say a regular product upgrade that we’ve experienced in recent years. We don’t have yet full indication from that, but what I can tell you from subscription is that it’s pushing the average deal size higher. And specifically, when we are attaching the cloud service on top of our appliance sales there’s a significant increase in the deal sizes.

Okay. And then second question. can you go over that comment that at the end of your presentation about increasing spending specifically, what are you increased in spending on and it kind of implied with one or two quarters, is that more sustainable spend in that? Give us a little bit more color around those programs and the duration of that spends increase?

Okay, I think those two points regarding the spend increase, one, that is being driven completely by the growth in the opportunities we see in the market and that growth in spending both R&D and sales and marketing. In addition to that or in top of that because of an OEM, joint development efforts we are doing, we are ramping up the dedicated teams for that joint development and we’ll start to see the impact of that in Q1 and continue to Q2. Now this is a long-term development effort that obviously is resulting we believe also in increased revenues once the products are released. But for 2015, I don’t see that investment tailing off because it’s a longer term approach and I think a very broad agreement in scope. So we are seeing two types of areas that we would like to invest more, general investment in the market especially to cloud, to security, both in go-to-market and field resources as well as R&D and in R&D investment with an OEM partner.

So is the OpEx costs, I know you are increasing it sequentially and that’s obviously in a seasonally weak quarter caused a little bit of compression, but is it on a full-year basis OpEx still growing less than revenues?

I believe so, yes.

Okay. And then last, Meir, can you just give us the enterprise versus service provider break and the geographic numbers please?

Yeah, sure. The enterprise contribute 69% of revenues this quarter while the carrier 31% and the split between regions, America, 42% of the business; EMEA, 32%; and Asia-Pac, 26%.

Great. And I’ll give the floor back.

Our next question is from Michael Kim with Imperial Capital. Please go ahead.

Yeah, good afternoon, guys. Just wanted to kind of get a better sense of what you are seeing in Asia-Pac. I think last quarter you talked a little about some challenges in China. And then more broadly one of your large competitors talked about some headwinds on larger projects and you are seeing sort of similar dynamics in the marketplace. Thanks.

So APAC delivered, I would say, an okay quarter. We do believe that there were strong opportunities for growth in some of the countries. I don’t believe the China situation is one quarter, it’s more a mix of items in the market including reduced spend by government, maybe by carrier, by state-owned enterprises, and so on, together with pricing environment, which has a lot of local vendor competition. Having said that, we’ve grown in 2014 also in China and we do plan to grow in 2015. So, all in all, we think Asia Pacific is a region that we can grow our revenue growth and we are expecting also this year to have a stronger yield than in 2014. Regarding the large deals, we didn’t see specific weakness in that, and I think you can see by our overall results, and specifically, our North America results that we feel quite a good environment in that.

Okay, great. And then I don’t know if I missed this, but what was the mix between existing customers and new customers for the business?

This quarter, existing customers contributed 83% to the business and new customers 17%.

And where are you seeing the strongest opportunities for cross-selling now as you sort of built upon that LAN expand [ph] model. Are you typically seeing just a lot of cross-sell between delivering and securities side of business or is it within the --?

So the obvious one between ADC and security, but with our new offerings, there is also a very strong potential to cross-sell the cloud services, as well as sell the product subscription services. So I think with the new product offerings, we believe we’ve expanded our cross-sales potential and we actually can gain much more share of wallet from the existing customers.

Okay, great. Thank you very much.

Our next question is from the line of Jess Lubert with Wells Fargo. Please go ahead.

Hi, guys, couple of questions as well. Maybe just first, you are laying out a fairly constructive demand in pipeline scenario entering 2015 and you are guiding Q1 below the consensus. I just want to understand what was driving that view. Has there been any change in customer willingness to spend? Is it just conservatism? Did you pull some business into Q4? Just trying to rationalize that one point.

What we have seen in the market, I would say, is consistent level of demand with what we’ve seen in 2014. So if you look in our 2014 H1 performance, I think we went out in the higher-end of our guidance and grew 13% year-over-year. I think our guidance for Q1 last year was around 9% to 13% growth year-over-year. So we are seeing consistency in the demand and as a result, our guidance is reflecting roughly the same growth rates, I think it’s actually 10% to 14% year-over-year. So we are not seeing acceleration in growth rates, we are seeing simply consistent demand and that we need to execute on it.

Okay. And then you mentioned in past signing of a new large OEM partnership. So I was hoping you could provide some additional details regarding that relationship, when we might see that begin to contribute to sales, how material you think that partnership could become. You talked about investments tied to this relationship, can you maybe touch upon the joint investment coming from the other side and maybe what gives you confidence that this partnership may end up being more like Check Point and [indiscernible] Juniper, you’ve had some hits and misses kind of on the OEM side. Why should we believe this one is more likely to be successful?

Yeah. Okay. So regarding the more details at this point of time, we cannot share more specifics, but obviously once we can and once this relationship is going public, we will be happy to discuss further. Regarding the impact on revenues, we obviously we’ve done it. We believe it’s going to be a positive investment and one that we hope that it will be significant. But as you said, time will tell, not all OEM alliances are successful, but we believe we’ve also learned from the past. And in this specific case, I think we are getting a lot of commitment and investment also from the other party which is always good at least in the beginning to gain more confidence in the seriousness they are treating these effort on their end.

Alright. Thanks, guys.

Thank you.

Our next question is from Joseph Wolf with Barclays. Please go ahead.

Thank you. I guess I was hoping we could get the break down of partner services as we hit year-end and any comment you could have on services as a percentage of your business, your backlog and what your expectations are for group of 2015.

The break down between services and end product was approximately at last year about 62% product and 38% services.

Is that growing consistently?

Yes.

And guess just in terms of the – as you mentioned in the cyber, can we get any more detail this year as we start the year maybe in terms of metrics? In terms of how broad it is or how fast it’s growing compared to rest of the business, and maybe a description by end market and geography. You mentioned you have got on global trends, but are the trends that you are seeing in the Americas are that consistent across your geographies? And are you selling the same kinds of products or security in each region at this point?

Reflecting many other IT markets, the U.S. market is leading in terms of adoption of new technologies and we see that also in the more advanced solutions from Radware and so definitely our security business and I would say the cloud subscriptions and so on is always first led by the U.S. market, but then we’re seeing a very consistent move and in recent years in a faster pace to the other geographies and I would say the second after the U.S is Western Europe and the developed markets in Asia-Pac like Australia, Japan, Korea and so on. So, we are now trying, of course, to accelerate this trend and through our help the cyber security events are really very broad and global in the nature, and so I don’t think the product splits that we have today are reflective that of something that’s less applicable to a or more applicable to a certain geography. Another trend we were seeing is that our ADCs are involved in more and more applications that are security related. For example, the integration of our web application firewall and policy management into the ADC on creating more and more gross sales with our overall security solutions. So we are seeing more and more projects where customers are deploying an application architecture from Radware across the data center and the perimeter that provide both load balancing and end-to-end security and the more we are integrating and providing security value across all the touch points in the network, the more we are seeing this trend.

That was helpful. And then just final on the cash, you brought back $20 million of stock last year. You’ve got this investment going on with the OEM that you’ve mentioned. Where you think the balance of investment and cash return will be 2015?

We seem to have – obviously we are looking to make acquisitions to broaden our product portfolio and accelerate growth. That’s something we definitely believe will be a very good use of cash. But as we’ve discussed before, we are very conservative in this approach and we want to make sure that acquisitions that we do are really synergetic and not just depleting cash. So we are very serious about it. We are seeing opportunities and evaluating opportunities in the market and we think that sort of especially in this environment where we are feeling good about our business, it’s a good timing to try and make a broader step in the market.

Alright, thank you.

Our next question is from Mark Kelleher with D.A. Davidson. Please go ahead.

Great, thanks for taking the question. Just wondering if you could address foreign exchange, how much is that affecting? How much of that affect your December quarter and how much is that influencing your guidance for March particularly in Europe?

Most of the currencies exchanges were reflecting in the guidance we gave already for Q4. Just bear in mind when we give the guidance the rate of the – is really shaken for example was 3.77, while [Indiscernible] was 3.81 and the impact of every penny is about $25,000 on the quarter. So roughly it’s about $1,000 in Q4, so it’s implied in the results that we gave exactly this time for, the guidance we get for this quarter, the exchange rate is included on that, so I don’t believe that we expect any further impact from currencies in the quarter, it’s about what we gave and built in our guidance.

Okay, thanks.

Our next question is from Rohit Chopra with Buckingham Research Group. Please go ahead.

Thanks, thanks very much. A few quick questions here, Roy, any dislocation at Arbor that you’re seeing out there helping the company and providing a tailwind?

We didn’t see much, I think the deal also did not close yet. So I think it’s early also to say how the acquisition of NetScout will do. But at this point can be managed, activated through the ACI controller and we’re getting very good feedback both from Cisco and from our customers about this integration and how broad and deep it is.

And my last question, maybe to Meir and yourself, but you think you could offer maybe a target operating margin for the end of the year, I mean does 25% sound reasonable or unreasonable given the investments that you have planned?

I think it’s too early for us. We’re guiding quarter at a time. Also like previous years, our main focus is in growth and really leveraging these opportunities as you’ve seen in 2014. Once we have good growth, the operating leverage will be almost taking care of itself. You’ve seen what was done in Q3 and now again in Q4. I think we moved in two quarters from 15% to 22% operating margin. So we are really focused on growth and on the investments that we need to do for that. At the same time, we are running the business profitability. So we are running expenses at this point like we’ve done in previous years in lower rates than revenues and then obviously providing our shareholders leverage from that growth. So, we don’t like to, at this point, give a specific target of the end of the year. But obviously, we will come up with a medium term target in the -- I would say, probably for the next quarter or medial time.

Thanks, Roy.

And we’ll go to Catharine Trebnick with Dougherty and Company.

All right. Thanks for taking my question. A couple of quick one. So deferred revenue was only up roughly 14% and your guide was down and you’re saying that it’s a healthy pipeline. So can you give us some more details around this? And then also the other thing is could you address perhaps the average deal sizes? You said they ticked up, but is it $250,000? And are you getting more multimillion-dollar deals?

Okay, as for the deferred revenue - yeah, okay, go ahead, Roy.

Go ahead, Meir, go ahead. I’ll take the second one.

Okay. As the deferred revenues, I mentioned this has increased by $8.6 million, but there is nothing to do with the pipeline. It’s all on the book and we’ll recognize on timely basis. So the pipeline will be addressed by Roy.

Okay. And I think as we discusses also before we are seeing good growth and you see the deferred revenue which is mainly service contracts that were booked and not recognized yet, growing at roughly the same rate as our overall revenues, again, pointing out to the same growth rates across services and products that Meir alluded to before. Regarding the deal sizes, we are seeing an ADC, I would say we saw a stable deal sizes and now with subscription we’re starting to see a move upwards. It’s too early to give you specific data on that but we believe there will be a nice impact from that. In security, we definitely see over the last several years the move upwards in the deal sizes. It comes from several factors the fact that enterprises are in need for protection for higher capacity devices and they are generally going for our high-end offerings. Second is our ability to sell more and more a complete solution and not only specific devices for a specific location, in the data center in that sense we are seeing projects that involve encrypted attacks, application attacks, networks attacks and so on, and that by itself has a significant impact on the deal size. And last but not least as I’ve mentioned a cloud subscription, when we are getting in security or in ADC, a data center design, you are probably speaking about north of $500,000.

Okay. And then one other question, you said North America was strong, is that basically carrier or enterprise? And the reason I’m asking is in North America you’re completely probably under served as far as your partners are and extending through the sales of the enterprise compared to like an F5. So could you address, do you think is this more the revenue from the carrier side, cloud side or enterprise? And then if you are focused on this data center how are you going to – what you’re going to do for your sales count to actually penetrate that. Thanks.

Okay. So this quarter, by the way, it’s not the same answer for every quarter, but this quarter we’ve seen strong growth in the enterprise side of our business. Regarding channels, we are looking on several types of channels the traditional channels and here we are, as our business is growing there is definitely a stronger relationship with the key channels in North America is obviously contract flag the ones that I’ve mentioned on the top-tier National Financial Services and top-tier customers that we are able close are gaining a lot of attention from the key channels. In addition, we have channel partners like our OEM partners. And I’ve also mentioned in that regard the Check Point relationship that’s allowed us also this quarter to close a major U.S. bank, all global bank with this relationship. So we are seeing multiple ways to expand our channel footprint. Some of it is through OEM and reselling partnerships with other vendors that have a strong channel network and some of it independently, simply as our business is growing and we’re focused more on delivering through and working with that additional channels, growing our own channel system.

Okay. And then one final question, how much are you increased in OpEx? If I might have missed that commentary earlier when I jumped on for FQ1 and for the full year?

Meir, maybe you repeat the number for quarter one?

Yeah. The operating expenses for the next quarter will range between $36.7 million to $37.2 million.

Okay. And that’s all right, thanks. I’ll pass it on.

And we have a question from Michael Leonard with Oppenheimer. Please go ahead.

Hey guys, thanks for taking my questions. I want to ask about the geographic growth fiscally EMEA. First two quarters of the year were pretty solid and then you saw a big slowdown into the fourth quarter. Is there anything in particular driving that rush weakness in Europe? Can you talk a little more about that slowdown? And how you see that reaching on forward?

So, we didn’t get the revenue growth, we wanted in Q4 in EMEA, but we think it in that regard it’s mainly a push out of some projects in key countries. I would not, we don’t think we need to read too much at this point in this and actually we believe 2015 will be a very strong revenue growth, given the opportunities and the pipeline we are seeing in EMEA. And we hope to re-discuss it in Q1 and hopefully show a different trend though.

Push out of projects in terms of the customers delaying the purchase of the solution?

We are seeing several types. We’ve seen some large security projects being delayed and more in Western Europe, we’ve seen some interruption in Russia and the surrounding countries that was related to the economic issues and budget allocations, given the currency shift there. So we’ve seen a – we’ve seen some pockets of weakness but as I said, we believe it should not be a long-term issue and we should be able to resume and accelerate growth there.

And cloud providers; are they in the service provider or enterprise segment?

We are putting them in the service provider.

Okay. So within service provider, how does growth compare between – might be compared to the traditional service providers versus the cloud players?

Okay, this is a very good question, but it’s quite hard to segment. In the U.S., you have those independent cloud providers, but internationally the majority of the carriers are also the largest cloud providers in these countries if you look on the – Japan or Western Europe et cetera. So it’s sometimes hard to classify it. So while in the U.S. we can say that cloud providers is growing faster than traditional carriers, across the world we were simply assigning it to carriers. It’s very hard to distinguish between the carrier or the hosting type of business and the new cloud initiative and cloud define their own network or data centers with NFV and it’s – you can assign the numbers as you wish practically.

Okay. And then last question, Check Point, has there been any change in that relationship in terms of the level of kind of demand you get from there?

I think we are growing the relationship and actually just recently had another – today had another meeting with the Check Point President. I think the relationship is going very well and strengthening in the field is starting to be very nice significant wins and you know we’re seeing good future for it.

Thank you, guys.

And we have a follow-up from Alex Henderson with Needham & Company, please go ahead.

Yeah. First, you’ve mentioned Russia, so kind of open that question up, by how much exposure do you have in Russia or other geographies that have seen such significant changes in conditions that’s occurred recently as a result of the oil price and commodity price pressures like Venezuela or Russia or places like that?

It’s very little, even if you count 2%, 3% of our overall revenues. But in a specific quarter, if you cannot book deals in the strong quarter in Russia, it can impact EMEA growth in two three points year-over-year. So as I said, I would not read too much into that. Our business is well diversified. I think it’s evident from what we’ve done last year given all those specific issues that happened here and there and also in our guidance for next year.

So, if I look at the split between security and ADCs, is it reasonable to think that the ADC growth was in the 9% to 10% vicinity and the security was in the 25% to 30% vicinity. Is that kind of a reasonable cut at it?

I would say it’s very reasonable to assume that the growth in security is faster than the company growth rate and ADC is a bit lower than that, yes.

And then on the sales force expansion, can you just remind me where you are in terms of expanding the U.S. sales footprints and what your plans are around that in CY15, I know you’ve added substantially last year, I think it was 50% to your sales rates last year. What’s your plans for the year around sales expansion in North America?

We continue to expand teams across the country both on a segment basis, for example enterprise or carrier specific sales people as well as to add geographical coverage. And we have a strong plan of adding. We will also add internationally this year in the all select markets that we feel very good about so you will see expansion also in the sales force and in some other markets outside of North America.

And lastly, on the European situation, it does look like conditions have slowed there because of a variety of factors, is your guidance for upcoming quarter being a little bit more cautious on your assumption for the European end market environment or is it a function of just a very strong fourth quarter in the U.S. and giving yourself a little bit more room for a more normalized tenant growth in the U.S., how should we view the guidance, forward guidance relative to those two geographies?

I think it’s a – what you’ve mentioned is included, but generally we are assessing the overall situation, the pipeline, the growth rates that’s we’ve experienced in previous quarters and we come up with this – with our best conclusion on guidance. You can see our track records from the past. We’ve been relatively accurate, I would say. So I think it’s a good call of what we are seeing out there, the range.

Okay. Thanks.

To the presenters, no further questions in queue.

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

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.