Welcome to the Radware Conference Call discussing Second Quarter 2021 Results, and thank you all for holding. [Operator Instructions] As a reminder this conference is being recorded July 28, 2021. [Operator Instructions] I would now like to turn the call over to Yisca Erez, Director, Investor Relations at Radware. Please go ahead.

Thank you, Christy. Good morning, everyone, and welcome to Radware's second quarter 2021 earnings conference call. Joining me today are Roy Zisapel, President and Chief Executive Officer; and Michael Goldberger, VP, Finance. A copy of today's press release and financial statements, as well as the investor kit for the second 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 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 that the Company files and it furnishes from time-to-time with the SEC, specifically the Company's last Annual Report on Form 20-F as filed on April 20, 2021. 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. I will now turn the call to Roy Zisapel.

Thank you, Yisca, and thank you all for joining us today. I'm excited to report strong second quarter that exceeded our expectations with record revenue and accelerated growth. Our strong performance extended across all business lines and all geographies, including growth in large deals, record new customer business and record in new cloud logos. Our achievements demonstrate the continued expansion of our cloud and application security businesses; our ability to execute on strong demand to our solutions, and our ongoing success helping our customers protect the critical applications. Second quarter revenue was a record $70 million, representing year-over-year growth of 19% and one of the fastest growth rate we had in recent years. Cloud and subscription ARR continue to grow strongly at 27% in the second quarter, reaching another record quarter. These results are underpinned by the accelerated transformation of enterprises to digital and the increase in global cyberattacks that make it critical for our customers to ensure they have the best possible cyber security solution for their business and application. In the second quarter the strong demand for our solutions led to solid growth in bookings and we earned some impressive wins. So why do we win? First, we are winning because of our superior technology. At the core of our technology, our sophisticated algorithms, they combine machine learning, fuzzy logic algorithms, as well as various behavioral-based detection and protection algorithms. Combined, these technologies enable our solutions to automatically adapt to the changing threat landscape and differentiate between the deep and attack traffic. That in turn position us to deliver the widest, fastest and most accurate security protection in an environment of constant attacks. One example is a large video gaming company in Asia Pacific, which experience the complicated DDoS attack both inside and outside the country. When their…

Thank you, Roy, and good day everyone. I'm pleased to provide the analysis of our financial results and business performance for the second quarter of 2021. I would like to remind you that the net otherwise indicated, all financial results are longer. The reconciliation between the GAAP and non-GAAP results for the quarter are detailed in our press release. We had outstanding quarter with both the top and bottom line results far exceeding our expectations. Second quarter 2021 revenue reached a record of $70 million, representing an increase of 19% year-over-year and acceleration growth from 11% growth in the first quarter of 2021. Total revenue was driven mainly by our application security and our cloud business. In the second quarter of 2021, cloud and subscription ARR grew 27%, compared to Q2 2020 and total ARR was $177 million, an increase of 8%, compared to the same period of last year. Looking at geographies, we had growth across all regions. America's revenue grew 2% in Q2 2021, compared to the same period of last year and accounted for 40% of total revenue in the second quarter. EMEA and APAC we are very strong. EMEA revenue grew 36% in Q2 2021, compared to the same period of last year and accounting for 35% of total revenue. APAC revenue increased 32% in Q2 2021, and accounting for 25% of total revenue in the quarter. I will now discuss expenses and profit. Gross margin for the second quarter of 2021 reached 82.3%, compared to 83.1% in the same period of last year. Our gross margin can fluctuate from quarter-to-quarter as a result of product and geographic mix. Operating expenses in Q2 2021 were $48.6 million, up 10% from Q2 last year. The increase is a result of higher commission, as well as travel and…

Thank you, Michael. We expect Q3 total revenues to be in the range of $70 million to $72 million. We expect the continued strength of the Israeli Shekel to cause year-over-year increases in our dollar operating expenses throughout 2021. We expect our operating expenses to be between $49 million and $50 million. This operating expense level reflects an estimated $1.3 million negative impact from FX, compared to Q3 2020 rates. With that Q3 2021 fully diluted EPS is expected to be in the range of $0.18 to $0.20. With our first half published results, the guidance we just shared for the third quarter and the continued strength we see for the second half. I would like to note that our yearly growth rate will be close to 12% year-over-year, well above our published model of 7% to 9% annual growth rate. This accelerated growth is driven by the growth in subscriptions and specifically cloud security. I will now turn the call over to the operator for questions.

[Operator Instructions] Our first question will come from the line of George Notter with Jefferies.

Hi, thanks very much and congratulations on the nice results here guys. I guess, I wanted to start by asking if you guys had any supply chain impacts in the quarter, it seems like it's been a constant worrying season in recent quarters, but I know you didn't expect to see much coming into the quarter but just kind of following up on that, was there any impact in terms of either missed revenue opportunities or margin?

We had a very little impact on revenues. There is obvious impact on our costs as some of those component pricing has gone up significantly, especially if we would like express delivery or to get more quantities earlier. But overall impact is minimal, definitely in comparison to what others are experiencing.

And then I guess, I wanted to also asked about sort of the gross margin in the quarter. You guys are running I think north of 83% for a lot of quarters there, now you are kind of below that threshold. I think you've been investing more in your scrubbing centers, but can you kind of talk about the gross margin performance and what has that down a little bit year-on-year and then how you see the outlook for the balance of the year?

I think overall, it's a mix between product and cloud security and subscriptions. Obviously, we are investing a lot in building and scaling. Our cloud security infrastructure's demand is strong and that is some minor, not big, negative impact on our gross margin. So we are guiding around 82% gross margin, we think for the time being that's a conservative way to think about it and as we scale, there's an opportunity obviously to improve that.

Your next question from the line of Andrew King with Colliers Securities.

Congratulations on the big quarter. I just want to dive a little bit more into the growth of the ARR metric since you have been reporting it has been slowing slightly going from 12% to 10%, now 8%. Can you just give us a little bit more color into that trend?

Yes, it's obviously had the total ARR growth is a balance between our device for appliances, service attached contracts and the other end the subscription and the cloud contracts we have. So we continue to see as I've noted a very strong growth in cloud and subscription continue to be 27% and scaling every quarter. We did have a weaker service attach, an ARR quarter, predominantly driven by one large customer that decided as of the refreshed our devices to a next generation devices. In the meantime they are staying without a valid support contracts. So we saw some weakness in the service attached contracts, however, the cloud and the subscriptions continue to drive us forward.

Great. And then in one of your press releases during the quarter, you guys mentioned an increase an emergency onboarding as a result of [Radware] reemerging. Can you talk about how that balance between emergency onboarding versus traditional sales process of this quarter and how that deferred versus historically?

Yes, so every time the cyber activity is going up and since the start of COVID it's breaking I think new records every quarter. Obviously, that impacts our sales cycles and specifically makes it more and more strategic and critical for our customers not only to protect but really to even upgrade their protections to what is considered best of breed or best they can afford. Every time a customer is under attack especially under DDoS it means they are experiencing downtime in their business, and as everyone moving digital and moving all the assets online that's a huge business interruption and business risk. When customers are under those ransomware or under those attacks, today they cannot send it by themselves. They just know it's especially a large customer that would probably experience a large attack is just no way to deal with it and then they need to approach us, sometimes our competition but more and more I think us to assist them. So definitely there is a positive impact for that. But the impact is even bigger because even if they are not - if a customer is not attacked directly by themselves, they see their peers in the industry, they see other customers and obviously the understanding of the need and criticality and budget allocation to Cybersecurity is increasing.

If I could just squeeze one more quick one in here, APAC really saw a nice bounce back in growth. Do you see those headwinds declining or was this as the one-time bounce back this year?

I think we've said in answer to several of the previous quarters about the declines in APAC. We said that bookings are looking to us good and it will eventually be seeing in the P&L as well. Bookings in Q2 continue to be strong and I think those - you're going to see, I don't know if to the extent of Q2 but you're going to see continued growth I think in Asia Pacific.

Your next question comes from the line of Tim Horan with Oppenheimer.

Why is the Americas growing so much slower than the Rest of the World and is there an opportunity for that to accelerate somewhat and I just had a follow-up also on the bookings?

Overall, I want to say, on the bookings, I know in revenues this time you see a slight - a very slight growth rate, but overall bookings continue to be strong and especially in U.S. enterprise. We didn't have a strong quarter in U.S. service providers and that impact the DDA, as the result we expect that to change in the second half but U.S. enterprise business continues to be very strong and actually lead our global business in terms of cloud business and subscription. So we are very happy with the progress we are doing in North America and the Americas in general and especially on the enterprise business.

A great color, and I think you said you had a tripling in new customer bookings. So I guess that's for brand new customers. Can you talk about what percentage of your growth usually comes for new customers versus existing? Or any other color there? Thanks.

Every quarter, the vast majority of our business comes from existing customers. This quarter, existing customers continue to do very well for us, but it was really an outstanding contribution from new logos.

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

This is Chris Reimer on for Tavy. Thank you for taking my question. You talked about enterprises accelerating their digital transformation. I was wondering if you're seeing traction for your solutions covering public cloud infrastructures?

Yes, we do. So, the other main product we have that is the cloud native protect and that continues to grow well, its customer based, it's ARR. We're heading to that in recent quarter also our Kubernetes WAF, our web security product that's targeting the applications, infrastructure predominantly in public cloud but also in private cloud and together we see we've very strong solution to protect the data playing, the application playing, and the control playing of our customers when they put an application in the public cloud. We had very nice wins, I didn't specifically talk to them in my prepared remarks on that, but also there are very nice new logos that approached us, as well as growing with existing logos. So, we definitely see more and more business, specifically into the public cloud. In general, our large enterprise and as I mentioned some of the wins like this construction company et cetera many of the workloads we serve are across the hybrid environment, some of them are in the legacy data center and our bigger a bigger portion of over time of them are actually residing in AWS, in Azure, in GCP and so on and we are protecting all of them, all applications across all environments. So, a lot of our customers are already migrated or are migrating or in various stages of this hybrid infrastructure, and we are providing across the board all applications, all the data centers and what I believe is state-of-the-art security.

Okay. And just is there any color you can provide on the M&A pipeline. You guys often emphasized that you're disciplined when it comes to multiple, I'm just wondering how you see the space at the moment.

Yes, we continue to be active in that space. The pricing of private companies does not - I would say does not help us to accelerate the pace of taking actions, but we continue to look for opportunities.

The next question comes up the line of Alex Henderson with Needham.

So, first off great quarter, so nice to see it but was hoping if you could give us a little more granularity on the portion of the quarter that came from what I would describe as the revenue stream or order stream, coming from your partners in aggregate. I know you don't want to break out an individual companies - want to say we hear some Nokia, we hear some CheckPoint or hear from Cisco, but could you give us an aggregate amount of what's happening with that, obviously that's a very positive development for you.

It was a solid contribution you know when I look in the group in total and specifically and I think that is also aligning well to the new customer business increase that we had those partners brought to us significant new customer. So, I mentioned the Fortune 500 by Cisco, I think there were more one in the quarter. I mentioned the CheckPoint bringing us really global 2000 customers one of the example I did not mentioned in my script was that I think at top five global bank that's placed through our CheckPoint relationship on multi-million dollar all for our security business. So, we continue to see very strong traction in large customers through those partners, carriers predominantly with Nokia enterprises, CheckPoint and across the board with Cisco. So, I think that's the core strategic element for us especially in recruiting new customers and then off course adopting them and growing them.

So, the partnership revenue growth or should I say order growth particularly in the cloud piece helped stripped the growth of the overall company or is it growing at the same rate or is it growing less?

Yes, in the cloud I don't know, I think it continue to grow strongly if I think of the major deals, we've done all of them I think had the cloud and subscription piece, so I think - they grow very, very well us.

And if you were to look at your pipeline with those, is that same pipeline that you saw coming into the quarter as strong or stronger coming out of the quarter? Has the pipeline strengthened?

So, although we had record quarter wining, record amount of closings, this quarter we're starting with a stronger pipeline. So, definitely new pipeline generation was very strong.

I assume that given your lack of constraints that you're not seeing any meaningful or significant change in the amount of time forward that the orders are being offered. I mean, I know we had talked to a lot of people with constraints on supplies that they have got visibility in orders out two, three quarters, I'm assuming that's not the case given your lack of constraints, is that true?

Yes, for us in that respect business is as usual.

Perfect. And then on the pricing side, I assume that you're not seeing the meaningful change in pricing either given you're mostly a software company, is that also fair?

Correct.

Perfect. And then one last question if I could, so as I'm looking at, you know the various partners can you just give us a rank order of which ones were stronger and which ones were lagged, was Cisco the strongest than Nokia, and then Check or some other order.

Yes, thanks all for the question, but unfortunately, I will not grade it at this time.

Ladies and gentlemen, I will turn the call back over to Roy for any closing remarks.

Thank you all for joining us today and have a great day. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.