Ladies and gentlemen, thank you for standing by, and welcome to the Radware Quarter Four 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Anat Earon-Heilborn, Vice President of Investor Relations. Thank you. Please go ahead, madam.

Thank you, Cindy. Good morning everyone, and welcome to Radware's fourth quarter and full-year 2020 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 forecast and estimates. Factors that could cause or contribute to such differences include, but are not limited to, impact from the COVID-19 pandemic, 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 or furnishes from time to time with the SEC, specifically the company's last annual report on Form 20-F as filed on April 2, 2020. We undertake no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date of such statement is made. Please note that, in March, management will participate in the virtual Berenberg Cybersecurity & DevOps Conference. I will now turn the call to Roy Zisapel.

Thank you, Anat, and good morning, everyone. The fourth quarter was a record quarter for Radware in many areas. We enjoyed healthy business activity, including a significant number of large high quality wins with top logos across multiple verticals. This was reflected in record revenues and bookings, and in book-to-bill ratio significantly above one. The list goes on. ARR reached a recover of $174 million, up 12% from December last year. We had record bookings in our cloud and subscription business, and cloud and subscription ARR growth accelerated, from 30% in Q3 to 35% in Q4. With roughly a year into the pandemic, it is clear that COVID-19 triggered acceleration in the digital transformation of leading enterprises that are rushing to serve their customers online. Physical lockdowns forced our customers to deploy more applications in the public cloud. This combination of remote working, more critical applications online, and the hybrid cloud environment have significantly expanded the attack surface. Applications and services that were not previously exposed to external internet traffic are now at risk. The impact on cyber activity is clear, and it is significant. And we are fighting the cyber war on behalf of our customers. And let me share some data points with you. The number of DDoS attacks mitigated at our scrubbing centers in the fourth quarter was more than two-and-a-half times larger than in the first quarter, and approximately 20% higher than in the third quarter. The total number of web application attacks we blocked in the fourth quarter, almost double from the first quarter. And the number of bad bot requests we detected increased almost 30% between the third and the fourth quarters. The attack motivations vary, and include activity from foreign governments, groups seeking financial gains, and political activists. We saw continuous waves of…

Thank you, Roy, and thank you all for joining us for a review and analysis of our fourth quarter and full-year result. Fourth quarter revenues were a record $69 million, at the high end of our guidance and up 2% year-over-year. For the full-year, revenues of $250 million decreased 1% from 2019. From original perspective, we are very pleased with the performance in the Americas, where revenues grew 8% for the full-year, and as a result reached $114.4 million or 46% of total 2020 revenue. Revenues from EMEA increased 4% and reached $78.4 million in 2020. And revenues from Asia-Pacific were $57.3 million, down 19% compared to 2019. As Roy noted, the change in the attack surface is still in acceleration and the digital transformation of leading enterprises that drove growth in our cloud and subscription business. Our cloud and product subscription revenues together with maintenance revenue comprised our recurring revenues that represented 66% of the total in 2020 compared to 63% in 2019. ARR, which normalizes timing differences in bookings, invoicing, and revenue recognition, reached a record $174 million for the end of December, up 12% from December 2019. Within the total ARR, cloud services and products subscription ARR grew approximately 35% more than December 2019. I will now discuss expenses and profit all in non-GAAP term. The differences between the GAAP and non-GAAP results for the quarter are detailed in our press release. Gross margin for the fourth quarter was 83.1% similar to 83% in Q4 19. For the full-year, gross margin was 82.8% compared with 83.1% in 2019. Our gross margin in each period is affected by the specific product and geographic mix, by the proportion of the cloud and subscription in that period, and by the cost of the cloud operation, and the pace of opening…

[Operator Instructions] Your first question comes from George Notter with Jefferies.

Hi, guys, thanks very much. I guess wanted to start out maybe by asking about the investments you guys are making in the business. I think 2020 was a year of investing in people and selling and marketing resources, particularly in the United States region. Can you talk about your priorities as you look into 2021, and how you see investing in the business going forward?

Okay. So we continue to ramp investments, as Doran mentioned and also I reported in my remarks. We think we are well positioned, so we will continue to hire in North America. Internationally, we will be more selective. And then we continue to put a lot of investment into our cloud platform, cloud service people, cloud delivery, and so on. So, though disappointed with the FX that played against us, that we continue to invest in the business given the opportunity we see.

Got it, okay. And then I know it sounded like the APAC region was softer for you guys this quarter, and I think even for the year. But can you talk about how you see APAC going forward, is that an area where you can invest more aggressively and get that business growing again or is there something structural or fundamental about that market, perhaps it's COVID that had you less enthusiastic about that area of the world?

Yes, so I think several factors played into our performance in APAC. One, we believe that that was the region that was hit hardest from the pandemic economically. Second, what you're seeing in our revenues is a bit delayed view of our bookings, especially as we move more and more into subscriptions. So, if you look on my comments from the first-half of the year I was talking about APAC weakness and so on, I think now you are seeing to the full extent in the revenue figures. However, on the good side, we've seen in H2, improved performance in APAC. I think all of -- overall our booking is solid for the second-half there. And I think you are going to see it in the coming quarters in the P&L as well. Having said that, we do see today our major opportunity in North America, and that would be our prime focus of investment, while we expect the other regions to grow even in a bit modest numbers.

Got it, great. Okay, thank you very much.

Thank you.

Your next question comes from Tavy Rosner with Barclays.

Hi, this is Peter Zdebski on for Tavy. Thanks for taking the question. I wanted to ask about the strong EMEA performance. Was this a direct result of some of the order strength you mentioned last quarter just kind of flowing through the revenue or was there anything unusual or expected there?

Now, I think also in EMEA we've seen second-half improved results. I think it starts to make its way to the P&L. And again, I think we're performing well. The wins that we have there are significant. The cloud business and the subscription business are doing well. And so, all in all, if you need me to rank our regions, North America is first, then second EMEA, and the third is APAC. So definitely we're now - we're currently satisfied with the trends we're seeing there.

Okay, great. And then I wondered if you'd comment on how you see the gross margin trajectory in 2021, after the nice recovery we saw in Q4. Is there an opportunity to keep driving sequential growth there based on mix from the cloud and subscription growth rate?

Yes. So, as I mentioned, they are -- gross margin is affected by product and the geography mix in one hand, so this is something that we take into consideration, the focus on North America will probably have some impact. On the other end, with cloud and subscription it's a contradicting trend, while the non-cloud subscription on our software, and they carry very high gross margin, cloud services are accompanied with the hosting and investments, so margins over there are a bit below. So overall, taking all into consideration, and as mentioned for the first quarter, we guided something like 82.5%, which is in line with what we achieved in the last few years. So the potential is there, but right now, seeing all the trends and all the revenue mix that we focused, we believe that we are in the right there, 82%-83%.

Thank you.

Your next question comes from Alex Henderson with Needham.

Thanks. So, good to see your numbers today. I was hoping you could talk a little bit about the split between enterprise and service provider, it's interesting to contrast that to what Cisco reported last night, where their service provider was up 5% and their enterprise was down 19%. Yet your service provider is down 9%, and enterprise up 13%. So, could you help us understand a little bit what's going on there? It doesn't look like the comp in [indiscernible] is particularly different, so [indiscernible] with the full-year of '19. So what's going on there? Is that a function of the shift to cloud being much more of an enterprise business, and you would expect service provider to gradually decline as a percentage yourselves or what?

Yes, so I believe this is a trend we're seeing already several quarters in our numbers overall, given our focus on enterprise security and cloud security as a service, obviously that's much more of an enterprise play than a carrier play. So the more we do that the more our focus is on the broader enterprise, it can be traditional enterprise, cloud native enterprise, and so on. But that's where the growth is coming. On the carriers, I think there is overall a good market there, but currently we are way more focused on the enterprise market and so are our strategic partnerships, with the Cisco Security Group, and Checkpoint, and that's where we're seeing the growth and the big opportunity.

So we should expect gradual decline as a percentage of sales, but not necessarily a decline in the service provider business?

Exactly.

All right. And going back to the cloud subscription, obviously a nice acceleration, and 30% in 3Q, 35% in 4Q, great numbers, can you help us out with what the scaling of this relative to the base within the overall company subscription numbers and the ARR numbers? Obviously it can't be -- if you're up 12% in total, that would suggest that the rest of the business wasn't up very much and this cloud subscription business is really the bulk of what's going on in driving overall ARR growth. Is that a fair statement, is it becoming a large enough percent, so that we could start to see an acceleration in the ARR as a result of that mix shift?

Yes. So, it is a growing number. And if you recall in the second quarter, we had 10% total ARR growth, now we're at 12%. And that movement is driven by clouding subscription growth. So, maybe let me recap, what's our total ARR, it's comprised of the cloud subscriptions of the product subscriptions, and together we call those cloud and products subscription. And that's where the growth of 30%, 35% come from. Hence the other large component is our service contracts, maintenance contracts on appliances, software, or hardware, which is the more traditional business we had. The total was 174, if you look on cloud and product subscriptions, it range $75 million to $80 million. So it's becoming a very significant portion of the overall cost 50% already and we believe as we continue to grow that, the rate that you've mentioned, we hopefully will see acceleration in the total ARR.

That makes sense. So I mean, inherently, a product subscription contract will encompass the service contract that you historically have gotten on perpetual products. So I mean, that's a natural cannibalization, does the declining opportunity to cannibalize existing business results in some deceleration as that becomes a less and less factor?

I think a lot of the products we sell in subscription are not cannibalizing existing products. So for example, all our management and analytic software, all our automation, software, all of that is sold only in subscription. So there was no perpetual equivalent to cannibalize. There are some other capabilities is a product add-ons that we sell, also subscription, but again, they're not cannibalizing any product perpetual. And the reason extend that you're right in those cannibalization. So overall, we would love the service contracts. And so to keep steady while we aggressively grow the product subscriptions and the cloud subscription.

That's very helpful. Thank you very much. Just one more question, if I could. As we look at the rapid shift to cloud, to digital transformations, to Kubernetes adoption, obviously, that's putting significant pressure on how do I secure workloads in the cloud, you've seen a lot of announcements from companies ranging from CloudFlare to Zscalar targeting that number of acquisitions, whether it's VMware or whether it's Stack at IBM, DivvyCloud over Rapid7, how do you see the security in the cloud for Kubernetes workloads relative to where you're positioned, either across the pre-deploy the runtime, inside the container or data in flight domain to the main portion of the market? What portion of that are you going after and what portions are you not going after?

Okay. So I think the three areas that we focus on, specifically, for Kubernetes Workload, we're going after the web application firewall, for the workload running in that Kubernetes framework, and that's inside the customer VPC. So that's the first, the second, like for any other application, Kubernetes apps not excluded. We provide cloud security as a service. It can be API securities, it can be both, it can be there and so on. And third, as they run on the public cloud, we protect the posture of the VPC of the customer, I mentioned that we had the record quarter there as well. And that, whether it's Kubernetes or not leaving all the API's of the cloud platform, AWS, Azure, and so on. And with that, providing better compliance, better how they need recommendations and detecting attacks as they go, on the other end, what we're not going after is we're not putting agents on these servers. So for example, what's called Cloud workload protection, it's not web, it's not a market, we're going after, we're agentless. We're not going after at this point, the Kubernetes security itself of the infrastructure; we're really keeping ourselves at the application and in the cloud workload level. And I think we're doing very well and we're seeing very strong demand from our customers.

Great, great job, I appreciate the answers. You're making great progress. Thanks, Roy.

Thank you.

Your next question comes from Andrew King with Colliers Securities.

Hey guys, thanks for taking my question. So obviously, over the last year, we've really seen Cisco partnership really ramped well, but could you just give us a little bit more of a color into how the Checkpoint and Nokia OEM partnership are ramping and going to be focusing your 2021 investments for those to ramp them?

So actually, all of them did very well this year and also this quarter. So, Checkpoint is also grew, we over doubled the business with Checkpoint in 2020. Again, major wins in leading Global 1000, Fortune 500 customers, very, very strong new logos to other as well as expansions in banking, in manufacturing, in carriers, and so on. So, there's definitely good momentum there. And we actually, as part of our investments for 2021, we're ramping investments also on the Checkpoint side. And last but not least, Nokia, it's obviously focused on the carrier market, but also there, we had a very nice wins in major telecom groups. They're helping us actually replace incumbents from competition, given their complete architecture and complete solution. And also, in Nokia, we're adding more capabilities, more resources to the partnership. So all in all, I think the three OEMs at this point are executing well, I think the potential is still much bigger than where we're, and we need to execute together with them to leverage that, but if you think about it with Checkpoint and Cisco on the enterprise side, and Cisco and Nokia on the carrier side, we should have very good access to all the leading carriers and the Fortune 1000, Global 2000 companies around the world. And we're working very hard to leverage that access.

Great, thank you.

Your next question comes from Joshua Tilton with Berenberg Capital Markets.

Hi, guys, thanks for taking my question. I just wanted to touch on the growth for the full-year. Do you kind of expect it to remain at the level that you've guided to for Q1? Or is this going to maybe somehow accelerate through the remainder of the year? And then also, if you could just kind of give us how we should think about the mix of recurring versus non-recurring revenue in 2021 versus 2020? That would be great.

So we didn't guide 2021, it's too early for all of you, although, we mentioned a lot of record and a lot of great start and we're very optimistic. But the Q1 with the midpoint of 8% right now, this is what we have and I assume that next quarter we'll have more visibility to talk about the following quarters, for the recurring revenues, yes this year we achieved the 66% which was a bit higher than what we expected. And what we mentioned at the beginning of the year was the 65%. So we assume that next year, we'll continue with our cloud and subscription, so the portion should grow, sentiment we will continue I hope to grow a bit on this one. This is already very high level and the target is to continue to do it.

And then just one more follow-up for me, is there any chance you can kind of give us a sense of where the gross margin is on the cloud subscription business versus the upfront software business?

No, unfortunately, no, too many assumptions that we need to do in order for to convince you to talk about this.

And also, I want to explain, each of the cloud services is different gross margins and in different stages of scaling in the cloud business, when we're opening new nodes, there can be big fluctuations in gross margin from one quarter to the other. And it's until we fully populate those nodes, that it goes back to those levels. So, it fluctuates a lot between services between periods. And at this point, I think what Doron mentioned the 82.5% guide for the full-year is what we would like to stand by.

All right, thanks guys. Congrats on the quarter.

Your next question comes from Yi Fu Lee with Oppenheimer.

Thank you for taking my question. And congrats on a strong set of results. Maybe first question for Roy, just want to comment, just want to get your comments on the elevated threat, cyber environment. You had mentioned earlier that DDoS at its peak, bot attack was at its peak as well, and it cooperates with our external research that your organic growth is over 100%. And then in December, you've seen a slew of breaches, starting with some of the cybersecurity firm as well, some sunburst breach, I was wondering, has this helped you in your pipeline, whether in the first-half of 2021, maybe some commentaries on that guys?

Obviously, the increased cyber activity is driving more and more business. I think it's becoming clearer and clearer to each and every enterprise around the world, that they must increase their defenses, that the threat is real, that is critical to their business. And that you need to really aim for a very, very secure, high-end solution. And I think, given our focus on really the high-end security to provide the best security in the world to applications and data centers, we're enjoying that trend. We saw, as we've mentioned throughout the year, and continuously into 2021, already, we know we're seeing very large enterprises that are taking us because of the strength in security because of our ability to block attacks that others are more challenged with. So definitely, we're seeing the impact of the pipeline and on booking already.

That's right. And then just a quick follow-up with that, can you -- I know, Roy mentioned earlier that Checkpoint relationship is going well. Just want to get your comments on the other two like I know Nokia's newer, how about Cisco last year, I think the guidance was 10s of millions of dollars, do you anticipate want to get your colors on, what's your expectation for 2021 for those three vendors, Cisco, Checkpoint as of yet, and that's it for me guys.

So I'll let Roy take the strategic one. But we mentioned a few years ago that we expect it to be tens of million dollars. And really we don't disclose the number. But you can imagine if we are about to be 2x versus last year, that was 2x versus the previous year, we're in a very good situation. We're very comfortable with this one. But again, we don't disclose, we don't break these revenues.

And as I mentioned, Checkpoint also did a very good deal. And so is Nokia, so at this point, all of them are growing rapidly with us. I've mentioned that as a group, they practically doubled. And we believe the potential is still there for more, definitely and as I mentioned our focus on the larger enterprises with them and with Nokia and Cisco and large carriers should deliver better and better results.

Thank you very much again Roy, have a good day.

Thank you.

Your next question comes from Alex Henderson with Needham.

Yes, just a couple of housekeeping questions, if I could. The $800,000 FX hit is that all in the interest income expense line?

No, the $800,000 that I mentioned is part of -- when we guided last quarter $46 to $47, so one good thing is that we added some expenses on commission, a very good quarter in terms of booking and that 100 is the FX that impacted the OpEx due to the strong Israeli Shekel. So, it's not -- [multiple speakers]…

So, is there translation in the interest income expense line at all then?

No, it's not the interest. It's only the OpEx that the translation of Israeli Shekel to U.S. dollar.

Perfect. And could you get me the headcount number? I don't think I caught it?

1,122.

Okay, thanks. And just -- I know you don't want to forecast anything beyond the first quarter. But, can you talk a little bit about the magnitude of the impact you think in retrospect that the COVID event had in the first quarter versus the second quarter? And how that trajected over the course of the year based on your best forensic analysis after the fact? Obviously, the second quarter should have much higher growth rate than any other quarter given that was the quarter that had the biggest impact. But, I think you also had some impact in 1Q. So, can you talk a little bit about what we should be thinking about in terms of the magnitude of that impact over the course of the year?

It's very hard to tell. Initially in the year, there were project delays. And there were obviously several segments that were practically shutdown in the world almost to to-date like travel and hospitality and so on although our exposure there is limited. On the other hand, initially as enterprises shifted to work from home, we've seen capacity increases. But, I think as the year progressed the main impact that we saw is not from COVID or maybe we got used it, it's more from the heightened security activity and hacking activity around the world. And to the extent, it is directly related to COVID or not, I don't have a view on that. But that I think was driving the main pipeline activity, the main business growth and so on. So, we are way more linked to that I think today than to the current impact on COVID. And it's by the way one of the reasons when we look into next year, it's bit hard to tell is the fact that countries are entering and exiting lockdowns and that we are seeing continuous delays on budgets and so on. Where we are not seeing delays and we're actually seeing increased investments is in cybersecurity. And hence, we are even more focused on that on the enterprise and more focused on cloud as a delivery option because that does not require any physical access to location or to an application. So all in all, I think we are well positioned. We have growing cloud service business, high security capabilities that really fit extremely well with the heightened attack activity and the fact people need cloud services in this environment.

Roy, I understand the point, but [I decided to coin], [Ph] we were down 2.3% in the first quarter and 3.3% revenues in the second quarter last year. Obviously, it's improved substantially as security became a much bigger focus in the back half of the year. And I am sure that's why your business is accelerating. I am just trying to understand the mechanics around the 2Q, compare a little bit so that we can have a better sense of whether that should be the highest growth quarter or whether you expect just the momentum of your business ends up being more important. And therefore, we should look at those comps as relevant?

Yes. We don't have guidance for the second quarter at this point. Generally if you look on the last several years -- I think the last couple of years also before COVID, actually Q2 was lower than Q1 in revenue for us. It's not to say that's what we are going to have now. We really don't have any thoughts on Q2 at this point beyond our growing ARR, growing visibility et cetera. You already see that in Q1 we are growing, of course, 8%-9%. At the midpoint, we're expecting good deal in front of us, but I cannot quantify for you the exact COVID impact, it's very hard.

All right, thanks, I appreciate the response.

I'm showing no further questions at this time. I would like to turn the conference back to Roy Zisapel.

Okay, thank you everyone, and have a great day.

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