Good morning and welcome to the Radware’s Fourth Quarter 2015 Results Conference Call. [Operator Instructions] Also, today’s conference is being recorded. If anyone has any objections, please disconnect at this time. I would now like to turn the call over to Radware’s Chief Finance Officer, Mr. Doron Abramovitch. You may begin sir.

Thank you, Cathy. Good morning, everyone and welcome to Radware’s fourth quarter 2015 earnings conference call. Joining me today is Roy Zisapel, Radware’s President and CEO. A copy of today’s press release is available on our website. This quarter, you can also find supplemental information in our website. During today’s call, we may make projections or other forward-looking statements regarding future events or future financial performance of the company. We wish to caution you that such 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 filed on April 27, 2015. And now let me provide you with an analysis of our financial results and business performance for the fourth quarter and full year 2015 as well as our outlook for the first quarter of 2016. We achieved solid results in the fourth quarter in line with our expectations. Revenues for the fourth quarter were $55.3 million. Looking at the revenues breakdown by geographies Americas accounted for $20.9 million and 38% of total revenues; EMEA, $19.8 million and 36% of total revenue; and APAC, $14.6 million and 26% of total revenues of this quarter. Enterprise revenues contributed 66% of total revenues and carrier 34%. Looking at full year, total revenues was $216.6 million, approximately 2% lower than 2014. In our press release and in our supplemental financial data accompanying our results, you will find a GAAP to non-GAAP reconciliation of $0.08…

Thanks, Doron. During the fourth quarter, we performed according to our projected revenue forecast and financial performance. We finished the quarter with strong overall bookings despite a challenging market environment. While we saw improvement in our overall revenues and bookings versus the third quarter, we still saw weakness in several geographies, such as China, Japan, Russia and Brazil and the U.S. carrier and service provider markets. We have taken several steps to improve our sales results including focusing resources internationally on markets that we feel continue to be strong and reducing investment in some of the weaker markets. In the U.S., we created a special sales force to focus on service providers while we focus the broader teams on the enterprise markets. Despite the weakness we saw in the U.S. service provider market, we continue to see a lot of business potential in new account wins in the segment. For example, in the first quarter, we announced several wins predominantly coming within two main applications. The first, protecting the provider’s infrastructure against attacks and the second, delivering new security services to service provider customers, namely cloud security services. Two examples from the fourth quarter for protecting service providers’ customers are SingleHop, a Chicago-based leading provider of managed hosting and infrastructure-as-a-service, serving more than 5,500 customers. And QuadraNet a Los Angeles-based full service data center provider with additional locations in Dallas, Miami and Atlanta. The main reasons these companies chose our attack mitigation system where it’s fast detection and mitigation of DDoS attack vectors, accurate detection of legitimate traffic resulting in low force positive and low administrative overheads. In addition, we announced last quarter a $1.5 million contract for comprehensive infrastructure protection project from a leading global cloud hosting company that focuses on business continuity and disaster recovery. We finished the…

Thank you. [Operator Instructions] And our first question will come from Alex Henderson with Needham. Go ahead please.

Yes. Hi, Roy, I didn’t catch the revenue guide, there was some static on the line when you gave it, could you just repeat that for me?

Alex, Doron, $48 million to $51 million.

Okay, great. Thanks. And can you talk about the percentage of business coming from security, I mean given the rough guide here, I think we need some sense of that at this juncture, can you give us a little bit more clarity on the difference between the growth in that business versus possibly declines in the ADC or is it across both lines, can you delineate between the two a little bit please?

Yes. So in general the security market is growing faster than the ADC market and definitely from a booking point of view a lot of our cloud subscription and product subscription are focused around security. And as a result when it comes to revenue, some of those booking are deferred and they are going into our deferred product line. So from a booking perspective when we include the cloud services and product subscriptions we are doing security is growing faster than industry and that was the trend for the full year and also in the past years. And from a revenue perspective, it’s – we are not breaking it, but as I said there are more factors to it.

So can you give us some sense of what the percentage is at this point, I mean it’s been a couple of quarters that had even remote indications between the two, it’s a critical juncture here for that piece?

Yes. Alex, we are not providing the break between the products. There is a lot of overlap also between some of the modules, between them. In our view going forward, we are really focused on the subscription business and services business and products overall, that’s the view we are taking on our business, not necessarily ADC, security and overlapping applications of ADC is in security. So we want to think about our business as the products that are going to enterprise datacenters and carrier datacenters, product and cloud subscriptions of augmenting our products and services that are primarily maintenance renewal contracts.

Okay. One last question, I will see the floor. China, Japan, Russia, Brazil if you aggregate the areas that you specified us weak geographies, I mean are we talking about what 35% of the revenue base in that footprint or more?

Okay. Thank you. Is that all Mr. Henderson?

No, I tried to ask another question there.

Okay.

Hello.

We are not getting – the host line has just disconnected. You can hold just a moment while we get them right back online.

And ladies and gentlemen, we do appreciate your patience while we reconnect with the host number. Thank you. Okay. The host line has been reestablished. Please, just one second, we will open Mr. Henderson’s line again. [Operator Instructions] Okay, go ahead with your second question.

Guys, do you hear me?

Yes.

Great. So, one last question and then I will seize the floor. China, Japan, Russia, Brazil cited as weak geographies. Can you give us a scaling on what portion of the business is in the geographies you are describing as weak?

It’s around 20%, 25% aggregated together last year and obviously decline this year.

Okay, thank you.

Thank you. Our next question will come from Michael Kim with Imperial Capital. Go ahead, please.

Hi, guys. So, regarding the Q1 revenue guidance, can you clarify if there is a change in the mix in that revenue base relative to product subscriptions and maybe clarify if there is some larger, smaller deal flow activity?

Okay, Mr. Abramovitch, we are not able to hear anyone there at the moment. The host line just disconnected again. I apologize we will have them back shortly. Okay. The host line is back with us again. Just one moment, we will return to the Q&A here. [Operator Instructions] Okay, thank you. And your line is open now.

Hi, can you guys hear me?

Yes, now we can.

Great. My question was about the assumption in Q1 revenue guidance on the mix shift towards subscriptions, cloud service and product subscriptions and also trends in deal sizes?

Okay. So, we don’t see a change in Q1 revenue mix versus what we see in Q4 and Q3. However, we do see a change versus last year, where our subscription and service revenues proportion will be higher and we expect this trend to continue throughout 2016. And as a result obviously, there is growth in deferred revenues and less revenues to be recognized over the short-term.

And any significant shifts in deal size or expectations to the early part of the year?

Not really. When we sell cloud services obviously, especially if it’s a multiyear contract, there is some increase in the security deals, but overall, in ADC and regular security deals, we don’t see a difference.

And with the growth in the subscription revenue, is that primarily driven by selling multiple subscriptions to existing customers, new customers taking on more subscription services for new opportunities or some combination?

It’s generally from new applications either in existing customers, but relatively speaking to our other revenue base, a big number of new customers.

Great, thank you very much.

Thank you. Our next question will come from Jess Lubert with Wells Fargo. Please go ahead.

Hi, guys. A couple of questions. First, for Roy, I was hoping to dig into the verticals a bit and better understand how much of the sequential carrier improvement was due to the recapture of split deals versus a more sustainable improvement and perhaps the five deals that slipped last quarter. How many have closed? How many are still outstanding?

So, around the half are still outstanding. The bad news they are outstanding. The good news they are still we believe in play and we believe we are in a good position to win them. So, I don’t have any bad news there except for the budget cycle and the budget allocation that takes us way longer than we were expecting or we were experiencing in the past. So, some of the uptick in the carrier is definitely the slip deals that you would. I think it might be good to look at Q3 and Q4 in carriers together. I don’t think dramatically our business has changed from the 70% to 75% enterprise, 20% to 25% carrier over the long run and sorry 25% to 30% on carrier over the long run. This quarter was a bit higher on carrier and service providers.

So Roy, last quarter, you suggested or implied that around $10 million worth of carrier business had slipped, is it fair to assume that about $5 million kind of came in and the rest is outstanding? Is that the way to kind of think about that?

Yes, give or take $4 million to $5 million came in.

And then can you touch on what you are seeing in the enterprise why that was down sequentially and to what extent you are seeing any impact from the shift to the workloads to the public cloud and to what extent you believe that is a reason of threat to your business?

I think the majority – the impact is not necessarily from that. But I think the majority of the impact of the deferred revenue as it relates to subscription selling is on the enterprise. So our cloud services, the DDoS cloud, WAF cloud, the ERT premium, FastView cloud, they are being sold to enterprise customers and less so to carriers and service providers. And as a result, the impact that you are seeing in growth in deferred from subscriptions is on the account or on the expense of product recognition in that segment. And I think that’s one. Second, I think the U.S. market overall did not perform as we wanted and that’s a bit also contributing to that factor. As it relates to public cloud, the move to public cloud is mixed impact on our business. If the – if a large customer is moving to public cloud it’s generally around one or two specific applications. We didn’t see as a complete bank, for example, moving the whole infrastructure to a public cloud. In these scenarios, we actually can benefit from a hybrid cloud deployment in ADC and very important, I mean or even in a higher scale selling security cloud services as they move to the public cloud. The bigger impact on our business in the move of the public cloud is actually the new startup that was starting there and building the whole infrastructure there and then we are not seeing them or covering them through our regular channel. To that end, you are seeing us more and more working with content delivery networks, with cloud datacenters, where they are buying our solutions. And I have mentioned, some of those examples, they are buying our solutions and offering them as a service to their customers. With that, we are enjoying some of the move towards private cloud, hybrid cloud, public cloud and datacenters.

And then just last question for me, this one is for Doron. It seems like the revenue outlook is a little weaker, but OpEx is expected to take up sequentially in Q1. So I was just hoping to understand how you are thinking about the need to invest relative to the desire to show leverage, what your leverage expectations are for 2016, should margins be up year-over-year and what would cause you to maybe temper the rate of investment moving forward? Thanks.

As I have said, we do believe that 2016 will be better, so we continued to invest. We mentioned it in the previous call that the main R&D investment is – was done in 2015 and now we are focusing on sales and marketing. So the run rate from Q4 and some minor additions that we plan to have in Q1 ‘16 is something that take the run rate of the OpEx a bit higher. We do feel comfortable with our monitories and how we see the business going forward. So with relatively lower numbers for Q1, approximately $15 million, of course the margins will be less than what we anticipated to be in the full year of 2016, but this is how we build the business side, now the infrastructure is very – is strong and is ready for the growth.

Thanks.

Thank you. Our next question comes from Ittai Kidron with Oppenheimer. Please go ahead.

Thanks. Roy, I wanted to ask about your conviction of return to growth later in the year, does that assume that the macro environment improves or this is independent of that, meaning just looking at your business momentum and so on and so forth?

We are looking on current business plans. So we are not factoring into that an improved macro.

Okay. And then regarding your subscription revenue, I think you mentioned that it was up 60% year-over-year, I have to say, it feels like at this point of your growth and moving to subscription that we should see triple-digit year-over-year growth, not 60%, I mean you see the growth in deferred, it’s about $5 million, $6 million on a year-over-year basis, I can’t imaging that all of that relates to subscription, which means that your subscription revenue is still low single-digits revenue, why are we not seeing 200%, 300% increases in the subscription revenue?

Its high I think we have given a full breakdown of our deferred revenue this time to give more visibility to the investment community. And our deferred revenue, our total deferred revenues this year went up by $17 million from $85 million to $102 million. You can assume that the big portion or a significant portion here is coming from subscription services, especially as the product sales are not going up, it’s hard to increase the maintenance renewal. So it’s clear, it’s coming from product subscription, cloud subscription that we were selling. And I think that can give you maybe more indication to the strength we are seeing in this segment. In addition, we have outlined that the actual revenue recognition and of course this is deferred over the period of the contract, the actual revenue recognition moved up 60% year-over-year.

Is the average life of a contract for subscription more than a year or is it a year?

The minimum we sell the subscription to is a year. So by this definition, the average will be over a year. We are not selling shorter than a year contract.

Okay. Well, I am looking at your deferred revenue right now and your balance sheet and it looks like it’s $42 million in December ‘14 near-term and $46 million in December ‘15. So it’s only a $4 million increase and there is no increase in the long-term deferred, so can you reconcile the numbers, because I am just looking the balance sheet right now, I only see a $4 million only short-term increase in deferred?

Yes. Ittai, Doron, please go back to the bottom line of the balance sheet. There is some indication what is the deferred revenues, if you need to take the long-term to short-term and as I said, you need to take some amount that is not yet recognized and we didn’t get the money yet which is approximately $30 million, which is offset from the account receivables. There is some star over there so you can see the calculation and taking these two numbers together with this $30 million, you will get to the $101 million, $102 million that Roy mentioned compared to the $85 million. There will be also some numbers in the Investor Kit that we will upload later that it will easy for you to calculate as well. But you can see it in the press release.

Good luck guys.

Okay.

Thank you. We will go next to Joseph Wolf with Barclays Capital. Go ahead please.

Thank you. With that 2-year in the deferred revenues that you just alluded to, is there a cadence with which we should expect the subscriptions as they come off on an even fashion or we should start to see that rolling off through 2016 or is it there some other method we could use to look into that breakdown of deferred revenues to get a sense of where it could be an inflection point in the growth in 2016?

The contracts are recognized pro-rata for month-by-month basically across the period of the contract. So if it’s 1 year, you are going to see it being recognized over the 12 months, if it’s 36 months or 3 years it’s being recognized evenly across 36 months.

So all the contracts are written the same way?

Yes.

Okay. And then you mentioned briefly that Cisco is – correct me if I heard this wrong, you mentioned that Cisco is a relative business that should start to produce revenue in the third calendar quarter of the year. What happens between now and the third quarter, are you past sampling, are you sending out a lot of product and as that relationship starts to contribute in the third quarter, will you break that out for us or give us directionally, how that business is going?

Okay. So a couple of points, first it’s the Cisco product, so it’s the Cisco hardware, our portion here of the – or our part of this product is software. So our DDoS and attack mitigation software runs on top of the Cisco Firepower next generation firewall product line. So it’s a Cisco hardware, the platform is – of course is running, of course Cisco software and one of the key modules there is our – is the Radware defense for DDoS. So we are supplying software and those are software revenues. For us, which obviously carry with them a very high gross margin. The reason I am mentioning Q3 for revenue recognition for Radware is because we are – Cisco is reporting to us one quarter after they start the service. So you can assume that we are expecting them to start selling or to start producing revenues in Q2. And during the time from now and then, there is a lot of training, the initial customers, beta customers that takes place.

Okay, that’s helpful. And that revenue will come in as just revenue it won’t go into deferred at all?

Correct.

Okay. Thank you.

Thank you. Our next question comes from Mark Kelleher with D.A. Davidson. Please go ahead.

Great. Thanks for taking the question. Just a clarification first, did you say that you expect year-over-year revenue to be up in 2016 or up by the fourth quarter, I just wasn’t clear on that?

Yes, for the full year.

For the full year, so that implies that the shift over the subscription revenue, that has – that’s going to be less of a headwind, is that fair to say, because it seems to be a significant headwind and it would seem to be a significant headwind for the full year, but I might have that wrong, can you just help to clarify that?

Yes. So I think headwind from an immediate revenue recognition point of view from cash, deal sizes and others, we believe it’s very positive. As we said in our remarks, we believe we will grow for 2016 and deferred revenue will grow as well. So we continue to see deferred growing because of growth in cloud subscription and product subscription. And at the same time, we believe revenue recognition for the full year will also grow versus ‘15. But we – we are planning to end up, basically the year with growth over this $101 million or $102 million in deferred as we exit ‘16.

But, I guess I am still unclear. So you are down 12% year-over-year in this quarter, some quarter going forward, you are going to have to make that up significantly, despite a headwind in subscription switching, is that correct?

Correct.

Okay. Thanks.

Thank you. [Operator Instructions] And we will go next to Rohit Chopra with Buckingham Research. Please go ahead.

Thanks very much. Guys, I have got a couple of questions. First one is just on gross margin, it’s been ticking down for the last three quarters, I just want to get a sense, is there a material difference between gross margins in security and gross margins on the ADC side, so that’s the first question, so just the difference between gross margin. The second question, I just wanted to try to understanding here on the competitive environment, can you tell us what you saw and maybe Roy you could elaborate on this, why wouldn’t there be an increase in competition as new – there is other competitors who are now copying you, so they have standalone DDoS boxes etcetera coming out. And then you have the sort of the bottom end of the market moving to the cloud as you said sort of the startup, so let’s just say you have a smaller TAM or something like that, why wouldn’t there be more competition going forward in that market, so gross margin and the competitive environment, if you could elaborate on that, please?

Yes. So regarding gross margin, we have roughly similar between ADC and security, the level of gross margin. However, in cloud subscriptions initially and with the initial contract, it might be that the gross margin is lower. With the renewable period and so on that also improves, we need to provision the customer, the customer equipment, the capacity to absorb the new customer and then over time, it obviously improves the gross margin. So I wouldn’t – we don’t see anything material so far here assuming the current market positions will stay. Now regarding the competition, you asked me specifically on the security market and I think in security – and specifically in our attack mitigation, while you can’t have a dedicated boxes or specific boxes for DDoS, today we are looking on attack mitigation in a much broader manner. A lot of mathematical algorithms that are needed to detect behavioral, to detect an anomaly and for example, one of our key advantage is the ability, in 18 seconds automatically from seeing an anomaly to create a fingerprint without any manual intervention that’s something that I think is taking a lot more time for others to catch up versus maybe launching the dedicated DDoS box. And I think if you look on our attack mitigation system and what we have built, it’s a complete system, it’s the product itself, it’s the cloud subscriptions and the cloud footprint. On top, it’s the managed service of both the on-prem devices and the cloud, the complete ecosystem here, which includes also Cisco and Check Point promoting our products to the endpoint that can be complemented by our cloud offering. I think we had several layers of differentiation in this market and we will continue to invest strong to keep the competitive advantage and expand it.

Thanks Roy.

Thank you. And our next question is from Catharine Trebnick with Dougherty & Company. Please go ahead.

Hi, good morning. And this is Jack on the line for Catherine. Roy, one quick question, can you give us more color on the progress of Check Point, I know you have signaled that revenues from the OEM relationship increased in the quarter, but going forward should we expect a steady increase throughout the year or are you expecting any acceleration in growth from this partner in the second half?

Yes. So far we don’t have visibility for the full year, but especially in the recent months and last quarter and so on, we are seeing another up-tick in the field activity promotions and collaboration between our field and the Check Point field. And revenues and pipeline indications are quite positive. On top of that, as I have mentioned in my remarks, Check Point expanded the breadth of the solution that they are now reselling from us. So initially, both the DefensePro product itself, it’s now extended also to the cloud solution. And as a result, we believe we can with that on top of the activity, we can grow the joint revenues even further. So, so far activity level, pipeline, recent quarters revenues are quite positive.

Thank you for taking my call.

Thank you. And we have no further questions in the queue. So, please go ahead with any closing remarks.

Okay. Thank you, Cathy. I would like to thank everybody for joining us today and have a great call.