Ladies and gentlemen, thank you for standing by, and welcome to the Radware Q4 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's 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 Heilborn, VP, Investor Relations of Radware. Please go ahead, ma'am.

Thank you, Joanne. Good morning, everyone, and welcome to Radware's fourth quarter and full-year 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 fourth quarter are available in 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. 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. I would like to remind you that in February 20, Radware will host an investor meeting in New York, where members of the executive team will provide an update on the company's business analysis. If you would like to attend, please email me at ir@radware.com. With that, I will turn the call to Doron Abramovitch.

Thank you, Anat. I'm pleased to provide a review and analysis of our fourth quarter and full-year results. Revenues for the fourth quarter increased 6% year-over-year with a record $67.4 million in line with our guidance. On original basis, revenues from the Americas increased 7% from Q4 '18 to $29.7 million. Revenues from Asia-Pacific increased 32% year-over-year to $17.1 million, and revenues from EMEA were $20.6 million compared with $23.2 million in the previous year. Full-year revenues were $252 million, and up 8% from 2018. Revenues from the Americas were 42% of total 2019 revenues, an increase of 4% from 2018. Revenues from Asia-Pacific represented 28% of the total, and increased 25%, and revenues EMEA were down 1% year-over-year, and accounted for the remaining 30%. For the full-year, revenues from the enterprise vertical represented 68% of total revenues and increased 7% from 2018, and revenues from the service provider vertical increased 10%. Recurring revenues that includes subscriptions and support represented approximately 63% of total 2019 revenues similar to the 2018 level of 64%. We continue to see strong uptake and increasing proportion of subscription sales. Therefore, the recurring revenues percentage is expected to remain high. I will discuss now expenses and profit all in non-GAAP terms. Differences between the GAAP and non-GAAP results for the quarter are detailed in our press release. Gross margin for the fourth quarter was 83%. For the full-year, gross margin was 83.1% in line with our expectations, and up from 82.7% in 2018. Operating expenses in Q4 were $46.4 million, compared with $43.2 million in Q4 2018, and slightly above our expectations due to expenses related to end of year marketing activities and accelerated commissions as well as additional headcount. While we continue to balance between investing in the business and controlling expenses in order…

Thank you, Doron. We are pleased with our performance in Q4. We had record quarterly booking and revenues to close a strong year. Today, Radware is in a stronger financial, technological, and competitive position than ever before. We have a broad and deep portfolio for data centre and application security and delivery which addresses the needs of private, hybrid, and public cloud, and is based on the industry's most advanced algorithms and state-of-the-art automation. We believe that with this portfolio we are well-positioned to continue to benefit from the secular growth of the cyber security sector. We will discuss this in more detail at our investor meeting next week. Today, I will focus mostly on Q4. In the Americas, we were pleased to see strong business activity in the fourth quarter with some of our largest customers electing to strategically rely on Radware for the data centre security needs for the coming years. We are very proud of the long-lasting relationship we have with leading financial institutes, content delivery network, and ecommerce companies who are among those who selected us again in the fourth quarter. Overall booking growth in the Americas is not yet where we believe it should be, but we are encouraged by the improvements we saw in the second half of 2019. In EMEA, we delivered very strong booking growth with record booking for the quarter and the year. The strong performance was achieved despite the market weakness we continued to witness in the U.K. and Germany. In Asia-Pacific, we believe overall we executed well. However for obvious reasons, we are currently somewhat hesitant with respect to the business environment. As such, we lowered our expectations for performance in Greater China in the current quarter. On the OEM front, Q4 was another strong quarter for this channel,…

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

Hi, guys. Thanks very much. I've got a handful of questions here. Maybe you can talk to the uncollected billings number, I think $28 millions or roughly $55 million sequentially was a pretty big jump, and we haven't seen jumps to that size in the past. I'm kind of wondering what drove that in the quarter, and then separately, I'd love to ask about gross margins also. Coming into the quarter, you guys I think guided 83% to 83.5% gross margin, and you hit the low-end certainly, but the top line in Q4 was a pretty good step-up versus the year ago, and certainly versus what we've seen in recent quarters. I would have assumed that would help gross margins as well, but it sounds like it wasn't flowing through. So I'm wondering if there's something changing there in terms of product mix or investments in datacenter assets or something that's limiting the gross margin upside. So, thanks for that.

Okay. Hi, George. So, for the first question then, yes, it was a quite a big or a nice number, the $54 million, it's a part of the total deferred, it's -- since we are a back-ended quarter, you can assume that there were some significant deals that we issued invoices at the end of the quarter and we didn't collect by the end of the quarter. I can tell that most of the -- these invoices were collected there during the first quarter, so it will be part of the revenue of the deferred revenues in the next quarter. So, it was quite unique, but it's kind of positive reflecting the quarter that Roy mentioned is a record one in terms of booking. So we saw a lot of these at the end of the quarter. So, nothing is specific adjusted number that we didn't collect most of it. And for the gross margin, yes, so we have two ways, of course when we grow our business, we do expect that gross margin will increase. Sometimes we see it in a clear way and sometimes there are some other issues that they impact, you mentioned the product mix, if you remember, we talked about -- sometimes about where we recognize the revenues, Asia-Pacific is a bit different and North America stuff like this, and another issue that start to impact the gross margin is our Cloud business, the Cloud is a bit lower margin in some cases. So, it's a mix. Sometimes we're getting benefits, sometimes we don't. This quarter by the way, it was quite balanced. So, the range that we gave is 83 to 82.5, is made sense, and we met it, and maybe the low bar, but it's part of what we planned. So, nothing specific in this one as well.

Let me maybe add to that, that given the ramp and the strong growth of the Cloud security, we're constantly in building mode, and actually winning in accelerated business. So the bids we have done in Q3 in Italy, Q4, whether there are additional datacenter scaling, bandwidth capacity in existing datacenters and systems and papers that we put into the service are impacting, but we are doing it obviously hand in hand with the bookings that we see and with the contracts that we signed or about to sign. So, all in all, we think it's a positive trend, and as things would ramp obviously there is some room for improvement also in the gross margin.

Got it. Okay, and then just as a follow-up, you mentioned that, I guess, if I just look at the guidance for the coming year, even for Q1, I mean it feels like you guys are going to invest in the business more aggressively, ahead of the ramp in revenue. Can you talk a little bit about sort of the change in philosophy, I guess, looking backwards, I tended to think of you guys as kind of bootstrapping the business and investing alongside top line growth, but it seems like you're pulling that forward a bit. Is there something you're seeing in the marketplace that's sort of changing your viewpoint on the timing of investments or what's driving that?

So I think it's several points. First, if you recall some of our guidance on OpEx during '19, we were aiming a bit higher every quarter, and we were not able to fill all the positions, and as a result, we came either below or on the low-end of our OpEx guidance. So, some of it is catching up to our 2019 plan and being very determined on doing that. Second, we do see a lot of opportunity in the market. Definitely we're seeing some of our key strategic initiatives. I mentioned the OEMs, the global system integrators is a very positive momentum, and we want to continue to fuel those activities, and third, as we build our Cloud security portfolio, and we'll talk about it more in next week, we think the opportunity in front of us in security is growing, and we need to bring more talent and more capabilities to address that. So, we think the market is good, we think our portfolio is good, we think our financial performance is good, and it's time to invest more.

Okay, thanks.

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

Yes, thanks. Roy, I was wondering if you could just give us a couple of data points here to start with. You mentioned in your opening remarks, hesitant on the environment and a reduction in your estimate for Greater China, but we're not really aware of you having a lot of business in Greater China, can do just tell us what portion of your business you have there?

It's under 10% of our overall business, but you call down that market $1 million, $1.5 million for the quarter. That's all nothing. We're not dependent on that market. Having said that, it's an evolving issue, for example, Mobile World Congress, I can tell you we cut the amount, we didn't pull out like many, many other vendors, but we did cut out the number of people attending simply because we think it will be much, much less active. So, we need to watch it. I don't think there's any, my comment was more than to say that we tried to take that already into account in our guidance more than anything else.

Okay, great. Thanks. So, looking at the numbers that you have outlined for 2020 you've offered up a percentage from subscription at 30%, is the subscription and support still around 63% for the full-year?

The recurring revenue is supposed to be number 63%, 64%. I mentioned that it should continue to be high depends on the mix of the deal. So when we guided when we gave the $270 million let me remind you that that is something that we mentioned with the goal in our investor meeting in 2018, that we still keep it and at that time, we repel to a decision to be part of our booking, total booking to be 30%. So we keep this assumption although in 2019, it was accelerated, and we mentioned that already in 2019, we reached 30%. So overall, we kept the same number that we mentioned a couple of years ago.

Okay, so basically, you're saying that the subscription percentage and the support percentage should stay roughly the same in 2020 as in 2019?

More this year should be more, let's say maybe a bit higher in terms of subscription it is part of our business but overall recurring should be more of that.

Okay, so Roy, you've indicated you're very happy with what you're seeing at Cisco, you're seeing improvement there. Cisco has been on the come for is it four years now or five years, it's hard to say, it seems like it's been waiting for Godot there, clearly Cisco would have higher margins since a lot of that is license product. So, you're implying that it's going to accelerate yet you have decelerated in your guidance from 7.5% revenue growth to 7% for 2020. You're giving guidance on subscription that's flat and you are saying implying that you're getting more from Cisco by the momentum yet. You're giving guidance a flat EPS, it seems like other than the tax rate, you're kind of stalling here relative to the progress that you've been doing on moving to a subscription model and moving to a more cloud-driven model. The numbers don't support a lot of evidence of a meaningful improvement. Can you tell me why I'm wrong in that viewpoint?

Okay, you made a lot of assumptions. I'll try to remember them one by one and go. So, first on Cisco, initially the contract was for software only and then you're right, but as I've mentioned in the last couple, of course we've broadened to the portfolio with them also to include appliances and cloud services, when they sell our appliances, when we sell our appliances and our cloud services through them. Obviously, our gross margin is below our average gross margin for the company. So Cisco is not a net contributor for gross margin. It has other very, very substantial benefits, including visibility to business, ability to close large deals and logos and so on but I would not say that they are the ones that can increase our overall gross margin of the business. That's one. Second, I think regarding the total annuity business as percentage of 2020, I don't think we're guiding it. We said that this year, it was around 63%, we're saying that subscriptions as a specific component, bookings will be above 30%. I think it's too early to determine that and we're not planning to give guidance specific on that. So let's wait and see. I do agree that with the momentum we have in subscription and in Cloud, et cetera, if all things being equal, they're probably going to be a growth in the percentage of annuity, but we're not guiding it at this point specifically. Regarding the overall revenue, revenue guidance for the year, the more we increase subscriptions, the more we have deferred. So it's not contributing to a stronger growth. In the revenue it does increase our total deferred, you can see that our total deferred for the field is growing again. I think this is 10%. So, all-in-all, we viewed the guidance as exactly continuing the trend, and we were at 7 to 9, we were 8 to 10, now we guided initially for 7, and the only point and I think we view that as a strong signal for our confidence is that we're putting a lot of investment into the business to maximize the opportunity, and so, my viewpoint is a bit different than yours.

But to just to round up that conversation, if you're not guiding subscription, you're implying subscriptions flat because you're suggesting subscriptions still at 30%. Then your growth rate in orders, which grew 10% is decelerating to comparable to your revenue growth, which is 7%, which again sounds like a deceleration, is this a reflection of the macro-environment, is it a reflection of change in the business? Well, I mean -- I'm still…

Yes, Alex, we're not guiding for flat subscription. Staying over 30 doesn't mean flat.

Right.

I think that there's no basis to think flat at all. We're expecting very strong growth in subscription like we had this year. It's our fastest growing revenue line. It's doing very substantial growth rates. We continue to see those trends. Q4 was our -- again as echoed, in all dimensions of Cloud subscriptions and product subscriptions, so I'm saying over 30 doesn't mean flat at all.

Okay, I'll see at the floor. Thanks.

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

Hey, guys, thanks for taking my question. Just so looking at the geographic split, I want to look a little bit more into a pack sequentially. You guys decreased about 10%, I wanted to get a little bit more color into what's going on there. Then also if you give any update as to when you would expect to see these headwinds or trail off in the U.K. in Germany?

So, as we said in previous calls, our view is on the regions, it's not quarterly, there will be fluctuations, especially if in a certain quarter we have a deal with a carrier, those tends to be a bit bigger, and then you might see declining revenue recognition afterwards, and so on. On a yearly basis, I think it impacted pretty well, and we are -- like we mentioned, we are more conservative coming into the field. At the same time, we see very good trends in EMEA and North America. So, we feel confident about the prospect there. Regarding EMEA, and U.K. and Germany, we are actually going to invest there as well. So part of our investments are going also to these markets. We think the market overall is not strong. We think the customers are hesitant. What we hear from other companies and what we see from the customers is that they are not in a full investment mode, but we think those are very strong markets. I mentioned our performance in EMEA last year to be a record, and we think we can gain shares as well there. So, we are going to invest also in these markets.

Great, thank you.

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

Hi, thanks for taking my questions. Most of them have been addressed already. Just you mentioned Cisco, can you talk a little bit about checkpoint in Nokia, how is the relationship going, was there any significant change compared to last quarter?

So, we did grow somewhat our businesses checkpoint. It's still a relationship that we need to take to the next level, and we're working very hard on that. It's still not where it should be. In Nokia, we do see advancements, I've mentioned I think last quarter that we had several beads with them ongoing, and we won in Q4. I think, actually the order came this quarter. We won beginning of this quarter. Our first winning on very major telecom global group, together with them displacing an incumbent and so that was a major win, and we continue to put more beads. I actually approved today another bead with them in a large carrier. So, that relationship is going well. I think it's a good -- they are now more focused on this integrated security and networking, and there's a bundled solution with some Nokia components, specifically the Deepfield flow and net flow detector and our mitigator was one package that Nokia is promoting together. So, I think that's the important business.

Thanks for the color. And then you mentioned, OEM system integrator as areas or investment for next year, how does that materializes, is it additional hires committed to telling into the system integrator or just like shared R&D or how should we think about the incremental investment?

So, some of it is definitely in field resources to cover the global system integrators in the different regions, and some is like channel managers, and technical resources to work with their architects and solution designers. So, marking an investment similar to what we've done in the OEM, I would say, and I think we started to see the first fruits in second-half of '19, and we look forward to do much more in 2020 and beyond.

Understood. Thanks for the color.

Thank you.

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

Okay, thank you very much for attending, and we look forward to seeing you next week in our Analyst Day. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.