Good morning, my name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Radware Q4 '18 Earnings Call. All lines have been placed on mute to prevent any background noise, and after the speakers remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Anat Earon-Heilborn, VP, Investor Relations, you may begin your conference.

Thank you, Sharon. Good morning, everyone, and welcome to Radware's fourth quarter and full-year 2018 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 fourth quarter are available in the Investor Relations section of our website. During today's call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. 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 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 is filed on March 28, 2018. I would like to remind you that in February 20th, Radware will host an Investor Meeting in New York, where members of the executive team will provide an update on the company's business and outlook. If you'd like to join us, please email me at ir@radware.com. With that, I will turn the call to Doron Abramovitch.

Thank you, Anat, and thank you all for joining us. We reported today another good quarter with continued growing revenues and expanding margins. We are growing a strong year during which we delivered growth, profitability and cash generation exceeding our initial guidance for the year and above our long-term CAGR which we showed last year. Revenues for the fourth quarter were $63.8 million at the high end of our expectations, and up 9% year-over-year. Full year revenues were $234 million, and up 11% from 2017. Revenues from the Americas were 44% of total 2018 revenues and increased 5% from 2017. Revenue from EMEA were up 34% and represented 32% of the total, and revenues from Asia-Pacific were down 1% year-over-year and accounted for the remaining 24%. For the full year, revenues from the enterprise vertical represented 69% of total revenues and increased 17% from 2017, and revenues from the service provider vertical remained at the same level as last year. Subscriptions, continued to be the fastest growing type of revenues. Recurring revenues that includes subscriptions and support represented approximately 64% of total 2018 revenues, compared with approximately 56% in full year 2017. I will discuss now expenses and profit all in non-GAAP terms. Non-GAAP gross margin for the fourth quarter grew to 83% from 82.3% last year and full-year gross margin went up to 82.7% from 82.2% in 2017. Over the long term, we expect gross margins to moderately increase driven by economies of scales of our cloud operations, our utilization rate of our scrubbing centers and then increasing proportion of non-cloud subscriptions. However, product and geography mix differences from one quarter to another, can cause some fluctuations around the trend. Q4, non-GAAP operating expenses were $43.2 million below our guidance, compared with $45 million in Q4 last year mostly…

Thank you, Doron. We are pleased with our performance in the fourth quarter and full year 2018. Second quarter revenue closed the record year, reaching $234 million. In addition, we had significant profitability improvement, net profit rose to $26 million and more than tripled from 2017. Record operating cash generation in the fourth quarter led our cash level to $401 million at the end of the year. We also had record quarterly booking in the fourth quarter, which is reflected in the double-digit growth in total deferred revenues up 13%. Overall in 2018 we continue to execute our strategy and deliver on our goals. We have full confidence in our competitive position, given the breadth and maturity of our solution portfolio and in the preparedness of the organization for the coming year. From a geographic perspective we are very pleased with our underlying performance in the international markets, EMEA and APAC. In the Americas, we were able to grow our revenues against the strong 2017. And in spite of some signs of softness in this region, specifically in the Tier One carriers. Overall, in all aspects and in all geographies we believe we are in a better position today than we had ever been. Let me briefly discuss what we are witnessing in our market data center and cloud application delivery and security solutions. Customer priorities are strongly linked to the ongoing transition of applications to the cloud and a very dynamic cyber security space. Our offering is very much aligned with these needs, while market leading attacking litigation capabilities and superior quality of the deductions. We have a complete offerings spanning the private, hybrid and public cloud data centers coupled with fully managed service offering. The quality of our offering means that we simply provide a higher level of…

[Operator Instructions] Your first question comes from Alex Henderson with Needham & Company. Your line is open.

Thanks. Congratulations on the nice quarter. I wanted to ask you a couple of quick questions on mechanics. So can you give us sort of the -- the current headcount and I didn't catch the book-to-bill?

Okay, so, hi Alex. So it's in the same level in last few quarters approximately 970 people that we now hire. What I meant, when I said the stable headcount. And as for the book-to-bill, its -- Roy, had mentioned it in a different way -- it was a -- in this quarter it was significantly more than one.

And then you talk about the subscription and service revenues being 64% in '18. Do you have a metric of how much you think that might reach over the course of '19. Are you anticipating continued growth in deferred revenues in '19, hence overall our order growth in double digits?

Yeah, so, we don't give the specific metric, but given the strength in subscription we're seeing, and the fact that we're moving more and more products and solutions to this business model, we obviously see growth, or we expect growth in '19 in the total deferred balance. And we will continue probably to see rise in the percentage of that -- of our total revenues, up from the 64% we had for '18.

I just wanted to talk a little bit about ShieldSquare with you guys for a second. First off, congratulations, it's a great acquisition superb positioning of that company. It's been a bunch of time talking to some of their competitors and most of the competition looks like it's growing in the order of 30% to 50% as bot attack metrics become really the most critical element of CDN protection and SaaS protection. So to that extent how rapidly do you think you can take this bot protection capabilities, back to your SaaS customers, back to your service provider customers and monetize the business, and maybe immaterial now, but what does it look like in terms of the ramp?

Okay, so, that the only comment, assuming we're closely toward the end of Q1, but believe it will take us between three to four months to integrated into our cloud offering. So our plan is by end of June to have it integrated into our cloud security solutions. And as you mentioned, we think it's an important addition to our cloud security portfolio. We think this plays extremely well with our DDoS, WAF and now the Anti-Bot capabilities and we believe customers and that's the feedback we were getting so far and from a customers and prospects we were discussing this acquisition, where we will find it very beneficial to get unified complete application security solution from us. So we're entering this market early on and we are looking to gain a very strong position there.

Okay, and would you think it in 2020 that you might be able to fully offset the dilution and have it contribute to earnings or how should we think about the fallout of the dilution from it?

Alex, we will probably show some more information in the Investor Meeting, but we do assume that it will be accretive in a way -- it's too early, but we need -- this is the time right now.

That's a safe assumption.

Next question comes from George Notter with Jefferies. Your line is open.

Hi, guys, thanks very much. I guess, a few areas of questions, maybe first we could just talk about the average duration of the total deferred revenue, I know in times past you guys have given us that number in terms of the years. Just want to make sure the growth in the deferred revenues is -- I guess coming more naturally rather than just extension of services contracts?

Okay. So in terms of the numbers, its quite stable in last -- I think 2.5 years since we started to disclose this, so it's approximately 1.8 year, so the -- the average duration of the contract that are right now in the total deferred revenues. So, as Roy mentioned assuming that we will continue to grow, I believe we take the assumption that we will continue to be in this level of a 1.8 years.

Okay, that's helpful.

In the last quarter the duration is short and actually the growth you're seeing is in a shorter duration of new bookings and you can see that also in own comments, when you mentioned the percentage of recognition in the coming 12 months has gone up by like 1% from 62% to 63%, that tells you the duration that shortened.

Okay, great, that's helpful. And then the 64% of revenue coming from recurring sources, that's an impressive number. Just out of curiosity, could you share that number for Q4? I presume it was higher as you exited the year, is that fair?

No, unfortunately, we don't share it.

Okay. No worries, that's fine. Maybe just stepping back just more intuitively -- when you go and talk with enterprise customers and you sell deals and is it fair to say that higher percentage of those deals are coming in the form of subscriptions, non-cloud type subscriptions. And I guess I'm just curious about what's driving that why our enterprise is more interested in constructing deals that look like that?

Okay, so, couple of points. Number one, I think, Roy mentioned that subscription is the fastest growing component of our business, well definitely we're seeing the trend. The trend going there and as we discussed in previous calls, we have multiple sources today of subscription, some are coming from product subscription basically capabilities that we used to sell its perpetual or new capabilities we are bringing to market, and they are only available now in a subscription form. Those are generally capabilities that our add-on or extensions of our product capabilities. I've mentioned, for example, The ERT Active Attacker Feed, it's exactly that. When you want this capability of blocking known attackers based on cloud intelligence in your product, you need to subscribe to this add-on capability. And like that, we have a growing set of subscription across both our ADC and security product lines. The second source of subscriptions is all the cloud. The cloud delivered services, the cloud DDoS, the cloud WAF and now it will be also the Anti-Bot and we're seeing very strong growth there as well. And last but not least, all the managed services. There is a major issue of expertise in customers around cyber-security and we're seeing them more and more subscribing to a managed service ERT, Emergency Response Team under attack services, et cetera, et cetera renew up the yearly services. So I think if you look on the underlying drivers for the customers to move to subscription. Number one is the cloud, they're getting used to consume cloud services and now -- and as it relates to us, our cloud services. Number two, the lack of expertise move them to source or to outsource some capabilities from the outside. And last but not least, as long as we continue to deliver innovative solutions that have clear value, like I've mentioned with this example, although we have several of these that are extremely successful. Customers are buying into it because of the value.

Yes, that's great. And then just one final question, I just wanted to ask about OEM customers. I think you guys mentioned one point last year that you expected to sign a new OEM coming through the end of the year, but I'm just curious about where that is right now?

Yeah. So, we did sign, it did contribute to revenues in '18. The public announcement depends on our partner and they're not ready yet to do that, but we've execute that and started to contribute to the number.

Thank you.

Next question comes from Tavy Rosner with Barclays. Your line is open.

This is Peter Zdebski on for Tavy. I just looking at the Americas growth of 5% for the year, we've understood that subscriptions and deferred growth was stronger than the Americas in the past. Could you give us a sense of how the deferred balance looks in the region -- in light of that 15% growth in total deferred for the year.

Yeah, so we don't break it by region, but so I don't want to go into specifics, but overall in the cloud adoption in North America is the highest, after that is EMEA and then APAC. Those are global trends, we would see similar aspects of that also in our -- in our bookings.

Okay. And just one follow-up on OpEx, you mentioned that the stronger dollar was a factor in the OpEx declined in the quarter. Do you have a sense of what the growth in R&D and sales and marketing spend would have been on a constant currency basis?

So, if I compare this quarter to 2017, there will be -- OpEx was down by $2 million out of it, there is something that $600,000 is shekel mainly to the R&D. And if I the compare it to Q3, or let's saw we added $700,000 the vast majority from marketing, sales and marketing activities and a very small portion is the FX. So these are the numbers, if I compare to these two periods.

Next question comes from Ittai Kidron with Oppenheimer. Your line is open.

Hi guys, good quarter. Couple of questions Doron, I just want to make sure when you saw 64% including maintenance and subscription revenue. Is that correct?

Yes.

Is there a way to give us more color on the subscription component itself. Again, it's just -- it's hard to get your hands -- our hands around what is the maintenance part, which I assume is probably the majority of the 64%, the relative growth rates of the maintenance versus the subscription. Is the maintenance even growing?

I'm not sure that -- that your conclusion is definitely correct because three years ago it was 42%, and so the growth comes from all the business trends that Roy mentioned regarding the subscription and now it's down to be 64%. Unfortunately, we don't break it quarters-by-quarters from -- and we don't break it in other ways -- between the subscription and maintenance, but you can assume that the growth comes mainly from subscription.

Okay, very good.

Let me phrase it a bit differently -- it look us like 15 years to build a maintenance base of high 30's, low 40's so to speak. And if you look on all our finances and you know them for many years. And then if you look at the last three years that figure moved once we started with the subscription from 40% to 64%. It's clear where the majority of the growth is coming from.

Yes, I just think you're doing yourself a little bit of disservice by not splitting it up because my gut tells me is that your maintenance revenue Roy, even though it took you to 15 years to build over it, and at this point is probably flattish. So the growth would have been even nicer even more transparent if for just split them up in my -- at least directionally correct in how I am thinking about this?

I don't want to say maintenance is flat, et cetera, but again subscription is the driver, absolutely on that you're right.

Okay, excellent. Now, regarding the enterprise revenue, the split there it's somewhat low on a year-over-year basis in this fourth quarter. Why would have expected some budget flush to work its way, after multiple core, as a very strong year-over-year growth. How do I get my hands around, what's going on to the enterprise and you had talked about some softness. I just want to make sure, in my understand what did specifically relates to?

The softness I talked about was mainly relating to U.S. Tier One carriers. Enterprise trends were very good in the quarter especially on the -- on the booking side, we're very happy with the enterprise business and the trends there. That's where most of the subscription business is going and in the trends are all strong.

Okay, very good. All right. Good luck, guys.

Thank you.

Thank you.

Next question comes from Zach Turcotte with Dougherty. Your line is open.

Thanks. Zack on for Catherine Trebnick. First, just kind of a follow-up on the Americas growth, just under 5%, I know it fluctuates quarterly, but how much of this -- do you attribute to the softness in the carriers versus just tough compare. How much do you see that rebounding in 2019, are you already seeing any sort of bounce back.

So, no overall I see -- I see those three factors. One is the tough compare like you said, Q3 last year, we went up 33% in Americas Q4, 27%, so like H2 was like 30% it was very low, that was a relatively high bar. Second, is the Tier One carriers, we don't think it's -- it should be long-term, we have very nice projects and so on, but we did see delay, definitely, in Q4, some a bit before that. And the third is our execution. There's always room for improvement, I think we can grow faster, I think we have -- based on the middle of comments I shared with the you, a very strong portfolio position and those things that we always need to improve in our own execution. So those are the three factors, that I think led to this result.

Okay, great. And then you had pretty consistent being raises throughout 2018, so even despite strong cost controls and sales and marketing as a percentage of revenue. Even declining pretty sharply. So, I'm wondering, are there a different direct sales efforts or channel efforts that you're using to drive the [indiscernible] raises. Do you attribute some of this too material revenue from OEM partners that you're finally seeing or what's the main driver of these [indiscernible] raises consistently?

It's a combination, I think of many factors. It's the portfolio, it is the trends in the market that are playing to our favor, they move to cloud, the cyber security becoming more and more critical. And I think in the OEM's are obviously assisting us in penetrating new customers, some of the new strategic alliances. But all in all, I think it's consistent execution of this strategy, we shared and starting two years ago in more details in the Analyst Day, a year ago we're doing that. It proves itself, and I think we're starting to see the fruits.

Perfect, thanks.

Next question comes from Josh Tilton with Berenberg. Your line is open.

All right, thanks for taking my questions. Can you talk to the types of customers you're seeing adopting with cloud deployments, beside from the hybrid deployments, you are seeing a situation where the cloud maybe opening up an opportunity for new customers, possibly couldn't afford and manage solutions prior?

Yeah, absolutely. I will give you one prime example. I think it's the cloud web -- the cloud web security. In the -- Web application firewalls are not new to the market, but they are considered to be very complicated to manage, you need to understand security applications and every time, is the new application version or capability going out and with DevOps now, its starting an agile, it's becoming a weekly, the release cycle, you need to adjust your web security to do that. That creates a huge cost and operational building on even the largest customers, not to mention, our mid-size customer. Now, I can assure you that all the customers that -- internet facing application must have a web security solution, many of them simply cannot afford the complexity and the cost. The Cloud WAF is opening up this opportunity for us and we are seeing very, very, strong growth there and I think this growth can last for years to come because it's one -- on one end, like I mentioned, the critical need of the customer. Second, is the clear displacement of on-prem WAF appliances that are moving to the cloud because of the security cost and operational benefits. And third because you can build a very, very strong, offering for example, adding Anti-Bot through the mix. So, definitely we're seeing new markets opening up for us, because of the cloud delivery and we are trying to execute as fast as we can on this opportunity.

Thank you. And then just on ShieldSquare. So my understanding is that your security capabilities had bot mitigation capabilities, especially around the issue of the dynamic IP address associated with the bots. The ShieldSquare just strengthen those capabilities, or does it bring additional security capabilities of the portfolio.

Yes, it's much deeper. When you want today to protect against sophisticated bot, it's not enough to look on the IP address, been the sophisticated bad bots of replacing them. The attacks like accounting closer or attacks from the inventory and so on, a way more complicated and, for that I mentioned in my comments, you need much broader, stronger algorithms, machine learning, hundreds of parameters per session that you take into account to distinguish. Again, it's not only between human and bots, you need to differentiate also the good bot, like search engines, like performance monitoring and so on. Partner API systems, so its really the ability in real-time to differentiate between the good bot and bad bot and human. And, I think we are very happy with the acquisition, and we believe we will see a significant contribution to our cloud-based services with it.

Thank you. And then just last one, I believe Cisco added your cloud solutions to its reseller portfolio in Q2. Can we get any updates on how that's going for the business?

It is progressing. For example, one of the wins that I've mentioned on the pharmaceutical top three companies that we won was done through Cisco just as an example.

Okay. Thank you.

Your last question comes from Alex Henderson with Needham & Company. Your line is open.

Thanks. So I was hoping you could give us some granularity around your penetration of the SaaS customer set, going in and selling to the sales forces of the world. And to what extent, if you could [indiscernible] CDN in there? That would be quite helpful?

Yeah. But I think at the very high end we're starting to be, with very nice market share, but the SaaS market is huge and -- the amount of companies is growing by the day. We have significant advantage there, technology advantage there that we are utilizing and we're winning more and more of these, but at least at the high end, we have excellent references, very well recognized names out there.

One of the other questions, really underneath the surface is what's going on between the security portfolio in the traditional businesses. I assume that the traditional ADC market is fairly flat -- and fairly flat in your business. Is that an accurate baselines.

We don't break it, as you know, Alex. However, I think the -- there is more strength in the ADC market than people give it credit.

If we were to look at just the, the last portion of the business. I assume that in terms of orders coming in, is delivering something in excess of 20% type clip. My assumption is the --that the -- now when your products and more advanced products that you've added to that are growing faster and the DDoS is probably around 20% as well. Are those kind of the right mechanics around the security portfolio set.

We don't break it to that granularity but, as Doron mentioned subscription in the overall, obviously cloud is a major part of it. It is the fastest growing component of our business, if the average does, it did like this year, to 11%. You can assume the substantial growth in our subscription business, and also in cloud, obviously.

And just to go back to Cisco, for one second, if I could. Any thought on actually getting some license and come out of that partnership with them? Or is this just Waiting for Godot kind of -- I mean, how long have we been talking about this, it's getting on three years, I think.

Yeah, it's progressing, we always want more, but it is progressing and we're looking for '19 again to bid that business, but we are not looking into a licensing deal. We are looking for more and more of our solutions being sold by their sales force.

Right, but didn't you have a licensing deal with respect to the software incorporated onto their boxes.

Yeah. So so it's an OEM deal, where whenever they sell it, we get the license, so absolutely. But it's not like a onetime software license. Maybe I didn't understand your question, being that we had with them.

And at this time, I will turn the call over to Mr. Zisapel.

Okay, thank you very much for joining the call. We look forward to seeing many of you in the -- in our Analyst Meeting in New York in two weeks time. Thanks a lot, and have a great day.

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