Ladies and gentlemen, thank you for standing by. And welcome to the Radware Q3 2019 Earnings Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand your conference over to your speaker today, Anat Earon-Heilborn, VP, Investor Relations. Please go ahead, madam.

Thank you, Marcella. Good morning, everyone. And welcome to Radware's third quarter 2019 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 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. These forward-looking statements are subject to various risks and uncertainties, and actual results could differ materially from Radware's current forecasts and estimates. Factors that could cause or contribute to such differences include but are not limited to general business conditions and our ability to address changes in our industry, changes in the macro product, 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 or furnishes from time to time with the SEC, specifically the company's last annual report on Form 20F as filed on April 15, 2019. We undertake no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made. Please note that management will participate in the Needham Networking, Communications and Security Conference in New York next week, and in the Credit Suisse Technology, Media and Telecom Conference in Arizona in December. With that, I will turn the call to Doron Abramovitch.

Thank you, Anat. I'm pleased to provide a review and analysis of our third quarter results, in which Radware delivered another quarter with revenues and profit growth, and increased profitability. Q3 revenues were $62.9 million, up 7% year-over-year. This is the 12th consecutive quarter in which our overall revenues are at or above the midpoint of our guidance a consistency that is mainly driven by our strong subscription growth. EMEA revenues were up 10% from Q3 2019 and Asia-Pacific revenues up 32% from last year representing 31% and 30% of total Q3 revenues respectively. Revenues from the Americas represented 39% of total Q3 2019 revenues and decreased 8% year-over-year. Revenues from enterprise customers increased 13% year-over-year. And revenues from carrier customers decreased 6%. Revenues for the first nine months of 2019 were $184.7 million growing 8.3% over the first nine months of 2019. The trends for the nine months period were more even than for the quarter. Americas increase represent over the nine months period of 2019, EMEA revenues increased 4%, and Asia-Pacific revenues increased 23%. Looking at the vertical break down into the nine months period, revenues from enterprise customers increased 4% over the first nine months of 2019, and revenues from carrier customers increased 18%. I will discuss now expenses and profit all in non-GAAP terms. The differences between the GAAP and non-GAAP results for the quarter are detailed in our press release. Gross margin for the third quarter was 83.3%, up 30 basis points from last year. For the first nine months of the year, it was 83.1% compared with 82.6% in the same period last year. Product mix and the increasing proportion of subscription revenues, as well as our focus on operational efficiency support this moderate upward trend. Still, there could be some fluctuations related to…

Thank you, Doron. The third quarter was another solid quarter for Radware, with continued revenue growth and strong profitability. Our market position is strong and our solution portfolio meet our customers' ever evolving needs to secure their business. Our performance in EMEA and APAC is broadly in line with our plan. Albeit, in the U.K. and Germany, we see a decline in our business, which we attribute to execution and soft market conditions. In the past few quarters, we had significant wins with leading organizations internationally and increasingly successful growth of our security portfolio in the market. Some of our third quarter wins include a competitive displacement of application delivery at the large European carriers and the new Radware customer, a government infrastructure security deal in Europe for a new customer, and then expansion projects for private cloud of a leading Asia Pacific bank. In the U.S., we look to improve our growth rate. Although, we won several multi-million dollar deals across a variety of verticals, we believe the market opportunity is significantly larger than that. We expect to deliver in Q4 stronger results in the U.S., and we are ramping our investments to grow our U.S. business. On the OEM front, we are pleased to report another record quarter with Cisco. And last quarter was by far the best one for this relationship. The momentum continued through October when we secured our largest win with Cisco to date. We are optimistic that in Q4, the fiscal contribution will set another record, and will continue to evolve in the coming years. Market dynamics continue to bring major growth opportunities to our wheelhouse. The application infrastructure is shifting with Kubernetes becoming the preferred container orchestrator system. New applications are constructed as micro services in a distributed architecture that boosts agility. With…

[Operator Instructions] Your first question comes from the line of George Notter from Jefferies. Your line is open.

Hi, guys. Thanks very much. I guess, I wanted to maybe start by asking about the Cisco relationship. You talked about the progress you're making there, record quarters. But anything in particular that you can point to that gives us a marker or a milestone in terms of the progress you're making, any more sort of flavor for that would be great. And then I also wanted to ask about the softness in the North American market, obviously, the nine months compares are better, thank you for giving us those. But I guess I'm just curious if anything is newer changing in North America? Thanks.

Okay. So first on Cisco, I think there were several good developments in the sense that the vast majority of our products, way beyond DDoS, also our cloud solutions, the WAF, the ADCs are now on the Cisco global price list and the sales force are getting commissioned for selling our solutions. So we see a much broader set of projects and involvement with them across the world. For example, the wins that I mentioned there from October, which was the largest together with Cisco is actually around the ADC and WAF, not at all on the DDoS, that's one. Second, the wins are getting announced inside the Cisco organization, they have significant size to some of those teams and that creates more and more activity, more and more traction with more and more teams and we're definitely seeing across the world, our pipeline with Cisco developing more projects, more meetings, more opportunities. And third, I think if you look on this relationship, the percentage of new accounts to Radware is extremely high. There are some projects that are overlapping to opportunities in our existing customer base. The vast majority is completely net new customers and that we do not have access to without Cisco. So we are seeing now already for several quarters, record quarters in terms of booking from them, and growing pipeline, growing momentum and we feel very positive on that. Regarding North America, as we mentioned several times, I think the quarterly numbers in revenue recognition might be a bit off of the trends we're seeing. But the nine months are pretty accurate, and we have, and we mentioned revenue recognition is around 3% up in Americas. We definitely feel there is much more than for us to take, and we've seen some weakness in North America enterprise. I think it's only the -- our own execution. We're adding more resources, we are putting more emphasis on leveraging, our partners in checkpoint and Cisco to drive more activity. And we are also focusing on our new cloud solutions that fit very well, both the Kubernetes WAF, the cloud workload protection fit very well, the status of the market in North America. And as I mentioned, we're already looking for a much stronger Q4 and with the investment, hopefully it will translate also to strength in 2020.

Your next question comes from the line of Alex Henderson from Needham. Your line is open.

Thanks. A couple of questions, if I could. First, the adjusted deferred declined quarter-to-quarter, quite a bit of that in the unbilled piece or the billed piece, excuse me. Can you issue? And then the second related question is the growth rate for the fourth quarter guidance of 5% to 6%, seems like it's decelerating. It also seems like it's well below, I think your stated growth targets. Is that a function of macro conditions, the slower hiring. How do we think about those two issues combined?

Okay. Hi, Alex. I will take the first one regarding the data deferred. So, let me remind you that the short term and the long-term that are in the balance sheet, remember that we had the uncollected amount and altogether, yes, we declined, but I mentioned in my prepared comments that we will follow our model, meaning that we will grow by double-digit at the end of the year. So it's mainly timing and when we said that apparently the full year will be between 7% to 8% growth, so the double-digit is in line. So as I said, it's mainly timing and -- all the -- the next 12 months is inline with all the trends that we saw in the last two years, meaning 60% to 65% of our revenues will be recognized in the next 12 months. So the trends are over here, it's a timing issue that we declined compared to previous quarter, but not last year versus last year we added 9%.

So does that -- weakness in the service provider space, particularly is that what's causing the slower revenue in the fourth quarter?

No, just a matter of -- again compared to previous quarter, it's a revenue recognition. I'd feel very comfortable, much comfortable if they would be able to add, but it's a timing issue. As I said, we expect fourth quarter to be in line with our model and to grow higher than revenues, and to increase compared to last year and to be a record total deferred revenues. Regarding the Q3 total deferred, you can see also that last year Q3 was a decline sequentially and therefore, we are suggesting that as we did in the past, the right metric is to look at year-over-year. Regarding the growth rate in Q4, you're right they are slower than what we've seen before. We're still in line with our guidance to 7% to 9% CAGR so the year will finish good. And we are looking to accelerate also the quarterly growth rate, we will discuss some of the investments that we are planning to make and some areas that we need to address, and we believe that we can bring it back to where it was.

If I could ask one last question on the OpEx side, implied in your guidance, if I take the dead bottom of your revenue guide band and the dead bottom of your gross margin band. I need to be at the very high-end of your OpEx guide and that would imply a pretty significant increase in spending sequentially. Is that predominantly going into the sales and marketing line, which if I do my math correctly would need to be up 7% to 8% sequentially, which given the lack of hiring in the last quarter, it seems like a pretty aggressive number. Is that -- there is something going on within those numbers that is causing that substantial increases that -- an acceleration in the hiring, what's driving that?

Yeah. So, definitely we are looking for some of it to go to the incremental hiring, some of it is additional marketing activities and increase in the Dev and the cloud operations. And some of it is -- every year in the last quarter we are paying easily accelerating dollars, higher commissions, et cetera than in other quarters. So, there's also a contribution to that. So between those three factors, we are forecasting that increase in OpEx. But for us, obviously, one of the most critical ones is to add the headcount in the sales and marketing areas. We feel that we can do better on that.

Okay. Thank you very much.

Your next question comes from the line of Vinod Srinivasaraghavan from Oppenheimer. Your line is open.

Hi, thanks for taking my question. You saw a nice uptick in overall enterprise results. Can you just talk about some of the factors that were influential there that offset some of the weakness in Americas? And then, can you also give us an update on your traction with Checkpoint and Nokia?

Yeah. Well, I think overall in enterprise, they are the most -- so between carriers and enterprise, enterprise are much more affected by the cyber attacks we're seeing. And as a result, there is a heightened sense of urgency there. And given the major complaints we're seeing in emergency on boarding of enterprise customers, we feel the enterprise market, especially the large enterprise is very, very good for us, given our position and our investments. And in the last quarter the results, the growth accelerated and we look for even better results going forward there. Regarding Checkpoint and Nokia, they are relatively growing in a single-digit type of scenario, so not where we want them to be. We do believe that with Nokia, we are bidding on several very large opportunities, which by the way on some we are also bidding with Cisco. So it's an interesting scenario that is not familiar to us in Radware, in the past we were bidding only by our sales. Now we have multiple parties, including our own channel -- regular channel plus Cisco plus Nokia bidding in some of those larger opportunities. And then depending on how will we win it, the Nokia numbers can grow significantly or stay roughly where they are. So we will see what the customers will choose to do. But all-in-all, I think also with Nokia, we're seeing more projects that we're bidding together, I believe, next year we should see growth there.

Okay, thanks. And just one more, what percent of your total revenues were reoccurring this quarter?

It's a bit more than 60%, and in the first nine months, we did better than last year. We didn't disclose the exact number.

Okay, thanks. Good luck.

Your next question comes from the line of Tavy Rosner from Barclays. Your line is open.

Hi, thanks for taking my questions. Most of them have been covered already. I guess if you can just talk a little bit that the good growth, you've seen in EMEA and Asia, what's been driving that during the quarter?

In general, on the revenue recognition side, we're seeing predominantly the growth in the subscription business and specifically in our cloud business, so both regions are growing very, very strong number of customers in cloud DDoS, in cloud WAF, in the new offerings, et cetera. And with that we're seeing and once we are entering a large customer, et cetera, we are seeing that allowing us to sell the more traditional solutions ABC or the on-premise security, but the prime driver of success is the cloud security.

Appreciate it. And then on the M&A front, are you -- do you have any companies in your radar at the moment. How are the valuations out there, if you can give us a bit of color on how you're thinking about M&A?

Yeah. We continue to look for opportunities in the market that would match our strategic direction and which will provide us with business leverage. The markets for M&A from a valuation for us from our standpoint of view, is not that easy, but we are looking, we're active, we're definitely have cash to allow us to execute. And I think while we are -- continue to look for that and while we continue to generate a lot of cash, I think Doron alluded to that we will probably accelerate our cash buybacks in the coming quarters.

Thank you. I appreciate the color.

Your next question comes from the line of Josh Tilton from Berenberg Capital. Your line is open.

Hi. This is Francois on for Josh. We have two quick questions. So in 2018, you doubled your subscription revenues specifically on the security side, can you speak to the specific products that are resonating the most with customers.

Yeah. So on subscription, there is a mix of subscriptions that are going strong. One I've alluded to is the cloud, all the cloud subscriptions are going very strong. And then on the products, we see some of the security attached subscriptions like our ERT Active Attackers Feed, like our ADC GEL licenses and that provides you know multi instances across multiple environments in more of an OpEx consumption basis, although, subscriptions are going very strongly right now.

Okay. Thank you. And just one more follow-up, how should we think about operating margin performance to-date relative to your 2020 targets?

We are still behind our 2020 numbers, which we mentioned, we aim for a 15%, now we managed to get it this quarter, and Riki Goldriech is saying that it's a bit higher because, A, we didn't recruit much and Riki Goldriech in his comments about the OpEx and we very efficient. So we are in line with the -- with what we said a bit ahead in most of time, but until we will change or modify our model, we are still behind our 2020 model, meaning 15% operating margin in 2020.

Perfect. Thank you.

Your next question comes from the line of Andrew King from Dougherty & Company. Your line is open.

Hey guys. Thanks for taking my question. So I know you've already talked about it a little bit, but I just wanted to focus specifically on EMEA. What was it that helped drive the 10% growth, even while seeing a slowdown in Germany and the U.K.? And how far out do you feel that you will be seeing this slowdown from Germany and the U.K. in the future?

Yeah. First, I mentioned this on several of these calls, I rather not speak about the -- or take the last quarter number and call it a trend on – especially, on the revenue recognition, given our high subscription ratios and deferred revenues and so on, and I would actually point you to the nine months is a better -- is a better filler for the actual growth of our booking and business in that region and that would be around a 4%. So it's a mix of areas that are performing very well and are growing in double digits, and not in the teens versus declines that we're seeing in Germany and the U.K.. And so while we are focused on trying to improve our execution in the U.K. and Germany, we think our decline is a bit higher than what we would expect with the market condition. We are going to invest even further into the other regions that are growing significantly and are executing well for us. So the 4% growth you're seeing for the nine months is already a combination of the market that's growing very well in U.K. and Germany, where we see some weakness.

Okay, great. And then just on the DSOs, as you see the proportions shift over more heavily toward subscription, do you still see that DSO number coming down even further long-term?

No, no, definitely not. I mentioned in my comments that we believe it should be in the high 20s. This is the right level for us even taking into account the subscription. In some cases, some quarters when we have very large deals and the collection is very good. So we see this fluctuation. But overall, the model takes the high 20s.

Great, thank you.

Your next question comes from the line of Alex Henderson from Needham. Your line is open.

Thank you very much. Can you give us a little bit of thought on the guidance for the tax rate for 2020 as we start thinking about the -- your modeling?

Well, so we're still not to talk about 2020 because we didn't disclose anything and we didn't see any -- but what we just mentioned. But overall talking about fourth quarter it will be 10% and this quarter was the one-timers I believe that the, we will be in the neighborhood of these numbers. But again it will not be significantly different, but we don't see if right now to the end of the 2020 numbers.

The second question, if I could. The improved record orders out of Cisco, obviously I would think that the majority of those would be licensing related. And therefore, higher margin product as that starts to ramp as a percentage of sales, is it reasonable to think that we have an upward bias toward GMs over the next text number of periods?

Yeah. So it depends on the actual mix. Now they have the complete product offering, so some of it can also be our appliances or large defense for appliances or our ADC appliances. Obviously, you know, the majority of the business today is around licenses as you've mentioned and also the large orders, we are seeing a lot of software and virtual and cloud solutions. And if that continues obviously the gross margin is – is very high. But I'd rather wait a couple more quarters to see the exact trend of the number to grow, and we got good statistics to have an exact opinion on that.

Has the acquisition of NGINX at F5 had any impact on you guys? Is that a competitive change in dynamics that's altering the environment at all?

So far, we didn't see. NGINX was also the vast majority of the customers as far as we know is using NGINX as the -- based on the free or open source version. And we didn't see specific steps from F5 that will clarify the positioning between NGINX paid modules versus the F5 BIG-IPs et cetera, so maybe it's too early to tell, but so far, we didn't see any impact on our business.

One last question if I could, you just announced a major expansion in your cloud protection on cross domain applications in particular Kubernetes, in particular. As we think about the degree to which you are cloudy, how do we think about the rate of growth there? Is your cloud-based growth significantly above the average, and are you starting to see a real acceleration in that? What kind of response are you getting on that domain to domain security offering?

So, we have initial customer wins there and some of them were all design process. So we see a lot of enthusiasm there. It's obviously in the very edge of where people deploy today applications in the cloud services. Overall, our cloud service business is growing faster from what we know or what we see from analysts or other major players in cloud security growth rate. So, we feel very good about our growth rates. Today, we think with the new solutions and that are taking us beyond just the front ending the application, but deeper into the workload, deeper into the application infrastructure security, we think our opportunity gets bigger, not only because the TAM is getting bigger. But our ability to cross sell and integrate the complete platform is becoming very, very meaningful.

Thank you very much.

There are no further questions at this time. I turn the call back over to the presenters.

Thank you and have a great day.

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