Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2016 earnings call. [Operator Instructions] And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Anat Earon-Heilborn. Please go ahead.

Thank you, Cynthia. Good morning, everyone, and welcome to Radware Second Quarter 2016 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 package for the second quarter are available the Investor Relations section of our website. On the website, you can also find my contact details. I look forward to working with you all. During today's call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that these statements are just predictions, and we undertake no obligation to update these predictions. Actual events or results may differ materially, including, but 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 21, 2016. Please note that management will participate in Oppenheimer Technology, Internet & Communications Conference in Boston in August, and in Dougherty’s Institutional Investor Conference in Minneapolis in September. With that, I will turn the call to Doron Abramovitch. Doron?

Thank you, Anat, and welcome to Radware. Good morning, everyone, and thank you for joining us on the call today. I will start with an analysis of our financial results and business performance for the second quarter and then move on to our outlook for the third quarter of 2016. Revenues for the second quarter were $49.6 million, in line with our expectation. Looking at the geography breakdown, revenues from the Americas grew $22.1 million, representing 45% of total revenue. Revenues from EMEA were $40 million, representing 28% of the total and revenues from APAC were $13.5 million, representing 27% of total second quarter revenues. Revenues from the enterprise vertical was $34.4 million and contributed 69% of total revenues, whereas carrier revenues were $15.2 million, representing 31% of the total. Before I move to discussing the expenses and profit, let me remind you that I will do so in non-GAAP term. The differences between the GAAP and non-GAAP results for the quarter come primarily from stock-based compensation expenses as well as from mitigation costs and amortization of intangible assets and exchange rate fluctuation related to balance sheet items. For a detailed GAAP to non-GAAP reconciliation, please refer to the financial tables accompanying our press release or to the investor package posted on our website. Non-GAAP gross margin was 82.7% in Q2 2016 compared to 83.3% in Q2 last year and in line with our expectations. Our operating expenses were $39.6 million compared with $35.4 million in Q2 last year. We continue to invest in our business and, in particular, in sales and marketing in order to support our initiatives across regions and solutions as well as our focus on providing superior customer service. Non-GAAP net income this quarter was $2.6 million or $0.06 per share diluted, at the higher end…

Thank you, Doron. We had solid results for the second quarter, with strong bookings in Americas and the service provider segment. We are well positioned to resume growth in the second half of 2016. We continue to be very focused on executing our strategy. First, providing the comprehensive integrated solution for data center applications and delivery and security. Second, lead innovation in the market as it relates to data center attack mitigation, secured hybrid clouds and SDN NFV applications for secured networking. In the second quarter, we announced that our Virtual Alteon application delivery controller achieved 20-gig of performance, the industry highest in OpenStack environment. OpenStack today is the de facto next-generation data center orchestration tool in cloud and hosting environments and is gaining a lot of traction with enterprises. Alteon Virtual Appliance for OpenStack is now more than 5x faster than the nearest competitor. This level of performance allows the network operators to truly leverage the advantages of virtual infrastructures and OpenStack environment. Our third bullet in our strategy: increase our market footprint and position our channels, OEMs and alliances as well as cloud and in content delivery network channels. We look forward to Cisco’s release of the Firepower 4000 line for the whole enterprise market with our DDoS module embedded in August. Once done, we will be at a position to start enjoying this OEM relationship revenues. Fourth, we continue to build our subscription revenue base, including cloud and product subscription offering. This first quarter we had record bookings from our cloud security and product subscription. We believe we are progressing well on this front and continue to build upon this new and easy revenue strength for the company. A nice example of a new cloud security customer is Myntex. Based in Canada, Myntex is a leading provider…

[Operator Instructions] We will first go to line of Alex Henderson with Needham.

So a couple of quick questions for you. The forecast for the fourth quarter, I know you guys only want to do one quarter at a time, but the forecasts for the fourth quarter are up quite substantially versus the third quarter. Given the single-digit numbers in the first 3 quarters of the year based on the 3Q guide, is it reasonable to think that we ought to be looking at very modest sequential improvement and not the $0.15 to $0.20 kind of numbers that are out in the Street? Are the Street estimates too off market at this point?

Yes. We don't give guidance, as you know, for the fourth quarter, but I would not expect anything beyond the regular trends that we had in past year. We don't review this year as a -- as exceptionally strong Q4 this time, especially given the economic situation across the world. So it might be too high. Let's go to your point...

Yes. The second question is how should we be thinking about the royalty numbers coming in from Cisco? Is that first kind of checks in the third quarter in the September time frame and then ramping into '17? And how large a number can that be in any sense of the initial uptakes or the trajectory of that royalty opportunity?

Yes. So we believe it will start signing in Q3, obviously, on a low level and ramp from there. We don't have yet statistics that we can share on the attach rate and the success of the Cisco product line, but obviously as I mentioned in the comments, the release of the 4000 line, which is the enterprise next-gen firewall, I believe will signal the term in Cisco to push the next-gen firewall product line over the current firewall line. And once that's being done, I think we'll have a much better clarity.

And one last question, and I will cede the floor. Any thoughts on the conditions in Europe post Brexit. Can you address that?

We don't have clear visibility. I'm not sure Brexit is the biggest event as if you look on the recent security events in Germany and France, that might be even more worrying, I think, for the economy, tourism, et cetera. So we are tracking that. Q3, in any case, is a relatively weak quarter in EMEA. We took that into consideration in our guidance and we will track the situation.

Our next question will come from the line of Michael Kim with Imperial Capital.

Can you provide an update on the opportunities for ADC with NFV? And are we starting to see a ramp in production tenders [ph]? And how should we think about that translating into the overall ADC business relative to the product purchases?

[indiscernible] ADC, NFV and also I had mentioned the OpenStack environment. Clearly, there was growth in ADC market. We've discussed in previous calls maybe some areas that are weaker for ADC, but we're definitely seeing several examples where there is a lot of potential growth in ADC, NFV being one of them. We are starting to do some initial projects in this area in Europe and in the far east and getting those from the U.S. with the early proof-of-concept.

And it is the main differentiator the performance versus competition, or are there other factors that maybe is driving some of that project activity?

So, first, there is a very strong performance advantage in NFV. The key point when carriers move to NFV, they obviously don't want to lose scale. And until today, and I think this is still the situation with our competition, the faster solutions, even on regular application delivery functions, are dramatically slower on the general purpose server than the appliances. We have a leading NFV performance capacity of 220 gigs today. We have a leading performance in OpenStack environment of 20-gig. And for the carrier customers, it means that they can really move this function of traffic steering in mobile networks or load balancing in the cloud environment, they can more that function from a proprietary appliance to software-based solution running on x86. So our performance is a critical factor in even -- in enabling such a project to take place, because otherwise it simply fails on the performance metrics of the current solution.

Great. And then lastly, I'm not sure if I missed this, but can you provide a metric on what percentage bookings came from subscription sales on product subscription?

Well, we didn't say, but Roy mentioned that it was a best ever subscription booking, but we didn't say the number. We did not reveal it.

Our next question comes from the line of Jess Lubert with Wells Fargo Security.

A couple of questions as well. I also wanted to follow-up on the outlook. You previously suggested the business would return to double-digit growth during the second half of the year. You're now guiding quite a bit below those levels. So I guess I just wanted to understand what changed in your forecast, maybe what the delta is versus your prior expectations with respect to the trajectory of the recovery you'd previously been forecasting in the second half?

So first, we would like to take it one quarter at a time. For Q3, the mid-range of our guidance is below double digit, but if you look on the half, it depends where we will be on the whole range. So we might see double digit, we might be a little bit below that, anywhere I think our guidance go to 4% to 10% on the mid-range to around 7%. So obviously below a clear double-digit guidance. However, we still see a way to achieve that. I think the 2 main factors that are different; number one, we see stronger subscription sales than we initially thought. So the mix in booking between product and subscription is getting stronger on subscription. I think you can see that on some of our financial metrics. And second, the situation in some of the markets internationally is more challenging than we thought at beginning, entering into the year in Q1. I think those are the factors we still look. It's very good growth, especially on booking and to some extent on revenues in second half.

Right. Can you tell us how much Cisco revenue you're embedding, if any, into your Q3 forecast? I know there is a lot of uncertainty as to how much it will deliver, but to what degree are you factoring Cisco into the Q3 forecast?

In Q3, it's very late. And so any meaningful contribution will be offset.

And then just last one for me. The enterprise business has now declined sequentially for 6 consecutive quarters. When you talk about a return to growth in the second half of the year, given some of the bookings and the shift to subscription, would you also expect to see that on the enterprise side? Or is the growth you're looking at for the second half really more carrier focused?

So, we -- most of our subscription business is enterprise. So I think what you're seeing on the enterprise revenue recognition is not necessarily decline in -- strictly in bookings because in some markets like in America, I think we are growing [ph] quickly there. However, you are seeing the impact of the subscription revenue recognition as the cloud services, the order subscriptions are targeting that market into a much lesser extent the carrier and service provider. And -- so we believe that market will also [indiscernible] are good, especially in the financial services, in online customers, and I believe you will see improvement also once the subscription revenues are getting into full recognition.

And does that start in Q3? Just trying to understand when subscription starts to become a tailwind versus headwind?

I think in Q3 we're starting to enjoy that.

All right.

And being a growing factor as it's -- prorated over the contract time. So as the quarters are passing, I think we will start to get into each quarter with much more annuity, business contribution from previous bookings.

Next we'll go to the line of Joseph Wolf with Barclays.

Just as a follow-up, I think, to that question. You mentioned some numbers that I was just hoping you could repeat, with $80 to $99 million to get to the deferred revenue. Would you mind just going through that again? And then explaining how that is -- how that works from a cash flow perspective?

Okay. Well, in the balance sheet you see the $80 million. This is deferred. What we added for last few quarters is the another additional. This quarter it was $90 million. It's the uncollected delivery bills, which were offset from the AR, meaning that we didn't collect the money yet, so it's not part of our AR and this is not a part of the deferred revenue. So from a cash perspective, it's a timing issue. I mean, in cash perspective, we didn't collect it yet. It's supposed to be -- I assume the business is growing in the next quarter or something like that. This is the only difference between the $80 million and the $99 million. The metrics that we say about is the $99 million. It was left in a way in our business. By that you can connect to what Roy mentioned regarding the subscription impact. So you can see that [indiscernible] is going instead of what we used to have in the revenues now is going to the deferred or to the additional in $90 million.

Okay. That was helpful. I didn't understand the first time around. Could you give us an update -- you mentioned it during the remarks, but could you give us an update on the Check Point relationship and how that's turning into sales?

I think we are progressing well. We are enhancing now the relationship also to our cloud solution and we are doing joint marketing with them in North America. And I think the -- at least the pipeline we're seeing continues to improve very nice. New customer wins in the quarter. Of course. It can contribute more to us, given the size and we are working together to increase those numbers, but we have good cooperation and commitment from both sides.

And then just finally on the geographic split. Was there any specific slowdown in the last couple of weeks of the quarter? Or was it as a general sort of market condition that you're referring to? And then could you just help us out in terms of the mix of business as you go through security subscription? Are these trends the same globally, or are the contributions from the different geographies slightly different right now?

So I don't have anything specific on the international market to say. In Americas, we did see acceleration during the quarter and -- we're very happy also with the way we're entering the third quarter. And in terms of subscription and security, the security is definitely a major portion of sales to new customers and large projects, but recently subscription is even stronger in capturing the complete, I would say, budget of the customer. It allows us to become very, very strategic and -- either to displace competition with our managed services or enhance our portion of the customer solution with our hybrid cloud solutions that include the products as well as cloud service accompanying it. So we're definitely seeing acceleration. We've seen acceleration in subscription revenues in Q2, and we believe the pipeline is also very strong for the coming quarters, but we need to see that we continue to execute well here.

And that's a global observation, or is that more of an Americas observation?

It's a global phenomenon, but the key strength is in the Americas, given the maturity of cloud -- of the cloud concepts and the cloud services, both -- mainly U.S.-based customers and Americas in general. These concepts are less utilized, I would say, in some key markets in APAC and in some second-tier markets in EMEA . So definitely the U.S. leads here as well.

Our next question comes from the line of Mark Kelleher with D.A. Davidson.

With respect to sales and marketing, I know you said a lot of resources regarding examples of return on revenue. Where does that stand right now? Are you comfortable with the sales organization, or should there be some leverage on that [indiscernible]?

It was very hard to understand you. I think the line is a bit bad. Can you repeat the question?

Sure. Sales and marketing, can you get some leverage out of that? And are you happy with where your sales organization is right now?

Cynthia, if you heard this, can you maybe repeat the question to us, maybe just -- maybe it was only on our side, it is not clear.

it is sort of staticky, but if you can repeat it one more time, Mark, and I will try to repeat it for them?

Okay. I'm sorry about the phone line. I'm just looking for sales and marketing. Are we getting any leverage there? Are we happy with where the sales organization is right now?

He wants to know if there is any leverage in sales and marketing.

Okay. And I think these is. A lot of our investments are obviously -- we are seeing the expenses first and leverage later. I know there is around 15% increase in sales and marketing in this quarter versus the previous year and those are obviously investments and -- that we are making for growth in the future. They are the targeting key verticals as we see growth in key geographies in solution.

And next we will go to the line of Catharine Trebnick with Dougherty & Company.

Couple of questions. On geo, I noticed that EMEA has been down quite a bit year-over-year since September 2015, and then also Asia-Pac seemed to dip both year-over-year and quarter-over-quarter. Are there any dynamics going on in terms of opportunities that aren't happening? Can you give us some more color on that?

I think as we've discussed in previous calls, in APAC we've done some changes and enhancements to our go-to-market plans there. We believe on both EMEA and APAC that we are going to see better results in the second half. If we look on that in aggregate, we do see some weakness in some international markets in EMEA as well as some markets in APAC that persist. But we believe, given where we stand today, the pipeline, our visibility in that second half also in these markets will be positive.

Well, when you're saying weakness, are you talking in terms of a macro, Roy, or are you talking in terms of actual demand for specific like DDoS or ADC?

I'm not speaking on macro. I'm speaking only on the projects we are seeing and most importantly, on the velocity at which they were closing. So in EMEA, in the last quarter, and in some key markets in APAC, we've seen delays and -- in budget allocation in terms of urgency and other priorities. In APAC, specifically, we also have some markets that are weak for us like China, et cetera, for other reasons, the way the market is behaving in local competition, pricing, et cetera.

Okay. So -- one other question. So you did say subscription was strong. Can you give a more quantitative around that for the modeling purposes? How is -- is it -- was it up year-over-year? Your subscription service is 90%. Can you give us some more quantitative data around that?

Yes. We're not breaking it, but I think if you go back to Doron's comments and you look on the comparison between this year and current year on the numbers we shared, you'll see there around 20% increase in the complete backlog of the deferred. It's predominantly coming from growth in subscription.

Next we will go to the line of Rohit Chopra with Buckingham Research.

Couple of questions. One -- the first one, I just wanted to get a sense if there was any currency impact, may be on the top line, if you can give us a sense if there was any translation issues possibly that impacted the top line? And the second question, I think -- I just want to come back to something. The enterprise number wasn't that great sequentially. And what I really wanted to understand here is, is there any competitive impact here? And Roy, the reason I'm asking you is, I think it was 2.5 or 3 years ago where you mentioned that when F5 came out with their new product, you saw a dip down in pricing. So I want to get a sense if you're seeing anything like that this time as they release their new product cycle?

Okay. So let me take this question first and then Doron will answer on the exchange. So we don't see any of the pricing dip, et cetera. I'm not sure F5 is still out with the product for the ADC market, but we're not seeing any such phenomena. I think it's a combination of weaker results than we wanted to do in EMEA and APAC, and that our -- especially APAC more skewed into enterprise market and in Americas the split of subscription versus product sales, which also impact our revenues recognition from that segment in the period. However, when I'm looking on the booking of the company and the projects actually won and the orders, I'm seeing good results in enterprise, very strong growth in Americas and better than what you're seeing in the revenues in the other regions. So I know from a -- the number analysis currently on the quarter on the revenues, it looks like a strong decline, but it's not versus the orders and the project that we are winning.

And for your other question, Rohit, in terms of the expenses, we do see a slight increase in terms of the -- due to the fluctuations with the currency, something like $0.5 million, not more than this. And for the revenues, we didn't see something significant. So obviously is the outcome of the exchange rate.

Okay. And -- so just lastly, look, Catharine is trying to get to something and she's trying -- if the subscriptions are really -- are going to impact the business, I think it would be helpful if you could provide a little bit more data. And I think you're saying, Roy, that the revenue numbers, they look kind of let's just say flattish, but if there is a percentage you can give us in the future or something like that, I think it would be helpful to make a better assessment. That would be great.

Okay.

Next we will go to the line of Ruben Gus [ph] with Opus Funds.

Just a quick question regarding your work with Cisco. So if I understand correctly, there are 2 offering: One is -- would be a part of ASR 9300 and second would be part of 4000 next-generation firewall. So my question in -- for ASR, is your DDoS protection is the only software, which is integrated with ASR? Or also I see some publication that Arbor has their DDoS prevention software offer doing ASR. And the same question regarding your next-generation firewall. Are you the only software DDoS protection company or are there other in the game also like Arbor?

Okay. So we are installed in the Firepower 9300 and soon in the Firepower 4000 series. We are the only DDoS provider there beyond the OEM, and I can refer you to the Cisco website, please go to the next-gen firewall product line both in 9300 and the 4000 then you'll see a clear description by Cisco of the line and the fact that Radware is their DDoS OEM partner.

So this is basically just PowerPoint kind of announcement from Arbor that they are also -- their Peakflow is integrated with Cisco 9300?

I don't want to relate to what others are doing. I can just refer to -- you to the Cisco Firepower. It's on the website, all the information is there.

So just -- the revenue start being recognized from the -- your work with Cisco on next-gen firewall. It's just very small, but it's -- you already you saw the recognition of revenues?

I was pointing to Q3 as the potential start, yes.

And with that, speakers, I'd like to turn it back over to you for any closing comments.

Thank you, everyone, for joining us today, and have a great day.

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.