Hello, and welcome. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the Radware Q3 2016 Earnings Conference Call. 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]. I would now like to turn the call over to Anat Earon-Heilborn, Investor Relations.

Thank you, Carol. Good morning, everyone, and welcome to Radware's Third 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 kit for the third quarter, are available on the Investor Relations section of our Web site. 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 those 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 Wells Fargo Tech, Media & Telecom Conference next week, in Imperial Security Conference in December, and in Needham Growth Conference in January. All three conferences are in New York. With that, I will turn the call to Doron Abramovitch.

Good morning, everyone, and thank you for joining us on the call today. I will begin with providing an analysis of our financial results and business performance for the third quarter of 2016, and then move on to our outlook for the fourth quarter. Q3 revenue was $46.9 million, in line with the announcement we made on October 10th, and down $1 million from Q3 last year. Looking at the geographic breakdown, revenue from the Americas was $20 million, representing 43% of total revenues, and up 4.6% from Q3 2015. Revenue from EMEA were $12.2 million, representing 26% of the total, and down 5.1% from last year. Revenues from APAC were $14.7 million, representing 31% of total third quarter revenue, and down 8.8% from Q3 last year. Revenue from the enterprise vertical were $33.3 million, and contributed 71% of total revenue, whereas carrier revenues were $13.6, representing 29% of the total. As we have discussed in our preliminary announcement, our business is undergoing a shift towards an increased proportion of subscription and services sales, which lead to lower than expected recognized revenue, despite double digit growth in bookings and book to bill ratio significantly larger than 1. This bookings growth is reflected in our total deferred revenue balance, which grew 21% from $85 million at the end of September 2015 to $110 million at the end of September 2016. Let me remind you that we calculate total deferred revenue by adding to the deferred revenue balance [at the end] balance sheet to uncollected billed amounts that were offset against trade receivables and are not presented on the balance sheet. These figures are presented in the investor kit which you can find on our website. I would like to provide you some more details on top of deferred revenues in order…

Thank you, Doron. And good morning, everyone. As we've discussed, amongst other things, the shift of our business towards more subscription and service sales accelerated during the third quarter. While the shift reflects a desire for business transition in our business model, reflecting more than expected revenues for the quarter. We believe that the strength in the subscription and cloud business model meets our customer [indiscernible], and at the same point creates a consistent and profitable revenue stream for Radware. We therefore intend to continue our focus on investments in this area. I would like to spend a few minutes elaborating on the strategy underlying this transition. Looking at enterprise customers, who increasingly prefer to buy fully-managed solutions that are consumed on a subscription basis, such as public cloud solutions, content delivery network, device cloud scrubbing, employee 24/7 monitoring and management capabilities. This preference is a result of several technological and operational reasons that are related to the shift to the cloud from a few interlinked sub factors. First, [indiscernible] applications to the cloud affect the entire infrastructure, and requires broader protection that encompasses the enterprise itself, as well as its cloud-based applications. Second, protection should match the access protected. So when the applications are in the cloud and not in the subscription model, buying security services subscription is now in line with that consumption model. Third, enterprise customers increasingly need fully-managed solutions, as they lack the expertise and the resources to manage their security solutions effectively in house. The ability to provide such management services in the cloud we think [indiscernible]. Last, when our solutions are deployed, both on prem and in the cloud, the level of security we can deliver is [indiscernible]. The clear trend of migrating enterprise applications to the cloud makes our solution critical. Not only…

[Operator Instructions] Your first question today comes from Jess Lubert from Wells Fargo Securities. Please go ahead.

Hi, guys. A couple of questions, perhaps you can help us understand what percentage of your business is subject to substitution from a subscription-based alternative, and where we are in that transition to subscription-based services. And in that regard, as we build out our models for next year, how we should be thinking about seasonality as we work through this transition, and to what extent you would expect to see growth throughout 2017, or if we should be thinking about that as more backend loaded.

Okay, so what we are seeing is as I've mentioned in the previous calls, is the deals that used to be product only have now significant components of subscription. As a result of that, the deferral of such deals is large. You can assume that in the ABC business, strictly load balancing, there's a smaller proportion as they grow, of subscription. While in security, we are encouraging a subscription of cloud security solutions very strong to the point of every win ultimately will involve one component of subscription or more than one. So down the road, this might be a significant portion of our complete booking in a certain quarter. Regarding seasonality, the way we are [indiscernible] in our business is on a year-over-year basis, for both the product and subscription [services]. Of course, with the growth of subscription and services, as part of the complete revenue recognition, those trends might get more smooth than we see them today. But at least for the short coming future, [there's still] there you see the regular seasonality in our business, we believe.

Right. Historically Q4 to Q1 you see a big sequential downtick, and then you see sequential growth through the remainder of the year with Q4 the strongest quarter. Is that the right way to think about next year? And maybe just last one from me is, we look at this transition across the different geographies. Where should we start to see the turn first? Which geographies may lag a little bit? So we can kind of see if things are progressing as you've laid out.

So without going into any of the outlook for Q1 or the rest of the year, for 2017 I would expect the same trends as we've seen before, a decline between Q1 versus Q4 numbers, and then probably an increase. As well we will provide specifics in Q1 in our next quarter. Regarding the shift, I think as I've mentioned in my prepared remarks, the U.S. is the furthest in the proportion of subscription. And so you this out of the services business. And I think over there we're already starting to see some signs, quite consistent growth, as well as was mentioned, it's a mix of product growth, regular product growth and the overall business growth, together with this mixture. But I think the U.S. is the leading indicator as far as our regions for the business, for the new type of business mix between subscription services and products.

Your next question comes from Joseph Wolf from Barclays. Please go ahead.

Just in terms of the growth commentary and that last comment on year-on-year comps, if I look at 4Q 2014 versus the guidance for this year, there's about a 15% decline in revenues, and about 10% from last year, 9% to 10%. Can you just talk about the subscription transition in that mix or maybe is there a way for you tell us-- you mentioned that subscriptions are accelerating-- can you tell us what percentage the subscriptions were in terms of the mix of bookings in this quarter compared to either a year ago, or even compared to 2Q?

So we're not breaking the overall deferred revenues of subscription and services. But as we've mentioned in our remarks, the big driver for the growth is coming from subscription. You can see that from our remarks that year over year the subscription-based services while maintaining roughly the same length, grew $25 million. So I feel that's a very strong point to the growth we have in subscription overall, and as well as how the mix is moving from the 10%, 9-10% we mentioned reduction in recognized revenue that is the close to 30%, which is in the total deferred revenue.

I guess a question-- you mentioned cloud transition. And you've got a healthy mix of enterprise customers. Are you seeing the enterprise customers move to the public cloud, AWS or Azure type services? Is that impacting their purchasing from you? Or do you have enterprise customers that are requesting your types of services, even as they move to the public cloud?

Yes. So this is exactly what I was trying to discuss when I mentioned enterprise customers. Assuming they move to the public cloud, there still is a high risk of security solutions. In they move to an Amazon or Azure or any other type of cloud, the need for our web application firewall cloud or business cloud is just increasing. So we have many customers that are either cloud only, meaning that they don't have more an on premise datacenter; or they are in a hybrid security, meaning they have several datacenters, physical datacenters as that are as their own plus applications in the cloud. And in that situation, they really want to have a consistent security capability across all the infrastructure, whether it's public cloud or not, the hacker doesn't [Indiscernible]. So when I'm protecting the company that's in both places, if they don't have a unified view [Indiscernible] one in the cyber world, [Indiscernible]. What we are providing with our cloud solution, and as I've mentioned, there's either a cloud only solution or hybrid cloud solution, meaning there's a component on prem, be it the public cloud or a private datacenter in our cloud security; regardless of how the customers are deploying our cloud solution, they have a consistent view across all their assets. They have a consistent detection and correlation of events. If an event is happening only in the public cloud or only in the datacenter, in a consistent policy of mitigation and it's feeding up information regardless where the attack happens. So this is a very, very strong value proposition. If you're going to the cloud, you absolutely need security. If you're a hybrid, you absolutely need consistent security for both, a real challenge in these specific market attacks across the datacenters.

That was helpful. Just one last question, if you look at the DDoS events over the last couple weeks, could you just give us a rough ballpark of how many of your DDoS customers are looking at this as a preemptive solution, and how many of them are reacting and don't make that DDoS purchase decision until they've already been attacked?

I think it varies. Of our existing customers, obviously they've taken action. But if you're asking for [Indiscernible] in general, I think it's a big question in the vertical market. I think in the financial segment, clearly cloud and hosting in some verticals there's a clear call for action. And in some verticals that are less online exposed, I believe that they are more overweight in key budget prioritizations, sometimes only against cyber stress, etcetera. But it's now mixed. But definitely, with that said, is the last one. And I can tell you there are daily multiple attacks that we are detecting in our customers [Indiscernible] services. Where clearly the level of activity, I would say, of attacks around the world, whether it's politically motivated, financially motivated, activism; it doesn't matter what it is. It's clear that people will need to take action.

Your next question comes from Mark Kelleher from DA Davidson. Please go ahead.

Great. Thanks for taking the question. Just first, some clarification, I didn't catch the gross margin guidance for the December quarter. Could you just repeat that?

82.4%

Okay. And could you give us an update on Cisco and how that partnership is progressing?

Yes. So Cisco is progressing well. We started to receive the first orders. We are expanding the footprint, the number of appliances and product lines with Cisco that we are residing on. And now we're looking forward to growth there. But so far, so good.

Okay. And then on the balance sheet, just getting back to deferred revenue, it was down pretty significantly sequentially. But if you add the unbilled contracts, it was actually up pretty significantly. So is that the move to subscription? Is that what we're seeing there? Is that what that gap is?

So I think if you're asking the growth important to [indiscernible].

No. The unbilled contracts are pretty significant.

Can you repeat that, sorry?

Yes. So deferred revenue was down sequentially. But if you add the unbilled contracts, it was up pretty significantly. So the unbilled contracts are a very large portion of that. So is that what we're seeing from the switch to subscription, a lot of unbilled contracts? And if so, what's the ability of customers to cancel those contracts?

No let me talk, if I remember, then maybe then [indiscernible]. The numbers that we grew both with deferred revenue in the balance sheet is from $55 million to $73 million at the [indiscernible]. And the total deferred revenue defined in the remarks grew from $85 million to $110 million. Obviously what we consider was both the number, is one thing that is quite firm. We have no reason to believe it's something that supposed to be cancelled or something that is out of this equation.

One comment, Doron mentioned in the review of numbers, the total deferrals is not about unbilled contracts. It's about not collected. So those are invoiced but not collected yet. So the real reason there's a closed order trend [indiscernible]. We are not even referring to contracts that may be all kind of exits for convenience, closures, et cetera. What we see with the total of these sales is that deferred revenues on the balance sheet plus the billed but not collected yet deferred revenues.

Okay. I'll follow that up a little bit more offline. Thanks.

Your next question comes from Rohit Chopra from Buckingham Research. Please go ahead.

Thank you. I didn't catch, Doron, the tax rate, so if you could repeat that, that's the first clarification there. And then my question is on OEM revenues. I just wanted to get a sense how Check Point is doing. And then what gives you the confidence that the Cisco relationship is going to perform better than Check Point, given Check Point's the largest pure play in security. They were selling a security solution. They're in your backyard. And it doesn't seem that they're performing well. But I just wanted to try to get a sense of what's different between Cisco, what's different between Check Point, if you don't mind.

I will start with tax, at the top of our guidance it's approximately 16%.

And regarding the OEM performance, of course there's no guarantees. But the Cisco relationship and the Check Point relationship are going after different types of providing our solutions to the market. The Check Point relationship that we believe is progressing positively, is really supplying DDoS solutions in a separate appliance very similar to how we are selling our solutions to customers. In that regard, they are providing us more market coverage and access to their customers, and allow us to increase our market share. The Cisco relationship is part of the next-generation firewall market niche. So Cisco is not selling an attack mitigation or a DDoS solution standalone. They're only selling this as part of their next-gen firewall. In that regard, it opens for us a channel to be billed then as part of next-generation firewall build, the [indiscernible] of customers interested or can afford a dedicated DDoS-only solution. So I think those are, again, expanding our footprint and go-to-market opportunities. We're seeing again through Cisco, an access to a set of customers that we are not able to get to by ourselves, and mostly Check Point is to advance [indiscernible] account. And number three, it affords us the opportunity that again we're not [indiscernible], but are a broader, I'd call it early-on next-generation firewall build. So we're actually feeling good about the mix, the opportunities that we exploit through the OEM partners. And we need to see the impact from both Check Point and Cisco.

Roy, may I ask a quick follow-up? As you look back at this past quarter, did you experience any incremental competition either on the ADC side or on the security side?

No. Nothing specific.

[Operator Instructions] Your next question comes from Catharine Trebnick from Dougherty. Please go ahead.

Mine is on the Cisco relationship. What type of marketing activities are being put in place to facilitate the drive of that relationship? And then any-- is this going to be recorded in the services segment of revenue or in the product? And then finally, can you give me the product-services split? I didn't catch that on the call earlier.

So regarding the Cisco relationship, the marketing activities done by Cisco. It's a Cisco product. So it's the firewall, a next generation firewall, and they are pushing it through the [Indiscernible] advantage. The challenge then is to internal activities and showing, etcetera. So it's not a Radware product, and it's not a Radware product that we sell in our channel. It's completely a Cisco product, but the Radware software is embedded. Regarding the product recognition there, it's exception. It's a type of product with accompanying maintenance contracts to it. So the maintenance goes to the services line, and the license goes to the product line.

Okay. Thank you. And now, Doron, what was the product services split? Thanks.

Could you repeat the question?

The product how much is it 70% products this quarter, 30% services?

No, no. Sorry. We don't provide this information on a quarterly basis, only on the full year.

Okay. Thank you.

Actually we might be able to share. Catharine, you might be referring to enterprise service provider revenues?

Oh, no. Usually, you usually give a product/services mix. I just fine. Thank you.

And presenters, we have no other questions in queue at this time. I'll turn the call back to you for closing remarks.

Okay. Thanks a lot, everyone, for joining us, and have a great day.

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