Welcome to the Radware Conference Call discussing Second Quarter 2022 Results, and thank you all for holding. [Operator Instructions] As a reminder, this conference is being recorded, August 8, 2022. I would now like to turn this call over to Yisca Erez, Director, Investor Relations at Radware. Please go ahead.

Thank you, Angela. Good morning, everyone, and welcome to Radware's second quarter 2022 earnings conference call. Joining me today are Roy Zisapel, President and Chief Executive Officer; and Guy Avidan, Chief Financial Officer. 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 the future financial performance of the company. These forward-looking statements are subject to various risk 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 market and 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 and furnishes from time to time with the SEC, specifically the company's last annual report on Form 20-F as filed on April 11, 2022. 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 to all of you for joining us today. In the second quarter, we drove solid results. Our total revenues grew 8% year-over-year, EPS was $0.18 and cash flow from operations was very strong at $31.5 million. Cybersecurity plays a pivotal role in today's business environment. And Radware is a provider of real-time protection, serves as a fundamental force in defending our customers most critical applications and data centers from cyber attacks. As the threat landscape continues to evolve with continuous increase in number and size of attacks, our customers must ensure their business continuity, strengthen resilience and improve the customer experience. Therefore, we have every reason to believe that the demand for our solutions will continue to grow in the long-term. At the same time, we also believe that uncertainties present in the current macro environment might impact the spending behavior of our customers in the short-term. Recently, we've seen some delays more than usual, and lengthening sales cycles in large deals in America's enterprise, with some customers opting for stage deployments. Looking at the bigger picture, Radware is a healthy company and we are well-positioned for times of recession. We operate in a large and critical market with a growing addressable market. We continue to deliver and forecast sustain growth, high gross margin and healthy cash from operations. We have best of breed technology which provides better protection for our customers. We have a large customer base that is diversified across industries and geographies, and we have a strong balance sheet with more than $440 million in cash. Backed by these assets, we remain optimistic about the long-term. Therefore we will continue to make investments in our business and specifically in our strategic cloud security initiatives. The demand for cybersecurity solution is highly correlated…

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 2022 as well as our outlook for the third quarter of 2022. Before beginning the financial overview, I'd like to remind you that unless otherwise indicated, all financial results are non-GAAP. A full reconciliation of our results on GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investor section of our website. Second quarter 2022 revenue grew 8% year-over-year to $75.1 million, compared to $69.7 million in the same period of last year. On a regional breakdown, revenue of the Americas in the second quarter increased to $29.5 million, representing 6% growth in Q2 2022, compared to Q2 2021. The growth rate is the same 6% when we compare the revenue of the Americas over the trailing 12 months. In the last week of the quarters we saw lengthening sales cycle in some of our large enterprise customers, which affect our growth in the region. EMEA had another strong double-digit revenue growth in the second quarter reaching $29.7 million revenue representing 24% growth year-over-year consistent with the longer term trend represented by the 27% growth in trailing 12 months. APAC revenue was $15.7 million, a decrease of 10% compared to Q2 2021. The long-term trend in APAC represent a modest 1% increase on a trailing 12 months. Americas and EMEA account each for nearly 40% of total revenue and APAC account for the remainder 21% of total revenue. I will now discuss expenses and profits. Gross margin in Q2 2022 was 83.3% compared to 82.3% in the same period in 2021, an expansion of 100 basis points. Our gross margin improve is mainly the results of the…

[Operator Instructions] We will now take our first question from Alex Henderson with Needham.

Great. Thank you very much. Hey, guys. I was hoping you could talk a couple -- about a couple of issues. So first one was in the quarter, it looks to me like you would have had earnings about $0.04 higher had it been not for the currency translation hit in the quarter. First off, is that right? And then second, as we look forward, can you remind us how you’re hedged and what your approach to the shekel is, at this point. Obviously, you’ve seen a very significant move in the exchange rates over the last pretty much since the war started in Ukraine.

So, hi, Alex. So I will start actually with the second part of the question. So we already hedge from the first half, let's say middle of the first half of the year. So the FX news really shekel versus U.S dollar didn't impact us a lot when you look at the non-GAAP reporting. But you can compare financial income from GAAP and non-GAAP and then you can see that -- you can see the impact of the new Israeli shekel. We already hedge for the beginning of 2023. So what was the first part of the question?

So your hedge -- yes, just going -- before you get off of that, your hedge …

Partially mid 2022.

So mid '22 to when? Mid '23?

Mid '23, but it is partially. It's not 100% hedge.

Partially. Okay. Okay. If the exchange rate stays where it is, how would that impact your OpEx costs? How much would you save on a full year '23, if the exchange rate stays at the current levels?

It's supposed to go down. More than 100 basis points. I'm saying …

So you would save a 100 basis points on OpEx?

Again, if the FX stays as it is today, we expect to reduce, let's say, OpEx based on the same headcount as of today, more than 100 basis point in 2023.

That's what I was looking for. Thanks. Going back to the operational aspect of your business, where you guys have been making a pretty, pretty aggressive play to sign up a lot of partnerships. And a lot of those partnerships are in the early phases of ramp. And generally speaking, take a long time for them to go from concept signing, a contract to impacting your revenues. In this environment, is that -- does that process get stretched out? Because those companies are looking at the macro and thinking, do I really need to drive this business forward? Or can I slow that down a little bit? How do we think about all of these programs? Because it's been a big piece of the investment thesis that all of these partnerships would ramp into a meaningful contribution over time?

Yes, I think it varies. I would say partnerships that were more of the natural reselling type of partnership, you might be right, they would look to minimize future investments to be more conservative, et cetera. At the same time, what we see from partnerships that are more towards the MSSP side, or the [indiscernible] or even the CDN, is that they actually feel an opportunity to increase their footprint and market sharing the customer. So some of those partners, I've mentioned, for example, as the with the bot management wing, and we have many others, especially in the MSSP domain, we're actually seeing a lot of activity from them, as they can increase their share of wallet in their customers, they can actually play very strongly on the fact that security now is a fully managed service at a very high level versus the need for dedicated OpEx and CapEx. So I would say it depends on the partnership, but definitely, some of them are acting very well, and we plan to continue to invest in them. They brought us very new -- very nice logos in Q2. Yes, it's ramping. Yes, it's still early, but we see promise there.

Similar [indiscernible] obviously, the Cisco relationship is an important piece of the puzzle. And you've had Cisco unable to get the parts necessary to ship systems, but sitting on essentially 40% of four quarter revenues, product revenues and backlog, does that impede the timing of when they ship your product? So with those products, how do we think about their backlog and your realization of revenues into that account because it's a non-material PC business at this point.

Obviously, the pieces of Radware software that reside on top of Cisco hardware, let's say the Firepower Firewall, if the firewall cannot chip [ph], then obviously we don't get our result. However, I think in every bad there is also good. This environment of supply chain challenges on the appliances is actually pushing Cisco and other partners of ours to strengthen our ties in actually in the cloud environment. So I do expect Cisco to be more active with our cloud DDoS offering, cloud WAF offering as a result of the lack of ability on their end to ship, maybe firewall in the quantities they we're used to. So I think we can actually, time will tell, it's still early and we will update you in the future calls. But we do have some new programs together with both Cisco and Check Point that are centered around the cloud solutions.

Great. I will cede the floor. Thank you.

Your next question comes from Tavy Rosner with Barclays.

Hi. this is Chris Reimer on for Tavy. Thank you for taking my questions. I was wondering if you could give any further color on gross margins and what's contributing to the expansion we're seeing there?

We mentioned that we grew around 100 basis point to a point of 83.3%. Some or let's say most of the growth is attributed to the acquisition of Security-Dam. And having more scrubbing center and WAF spread over the over the globe allow us to get higher gross margin.

And how confident are you in the pipeline through next year, especially considering the macro headwinds, if they persist and considering if the customer behavior changes longer than you expect?

I think in my comments, I've mentioned that we took that into account in our forecast as much as we can at this point. I would like to draw the attention to the growth in our ARR. So the annual recurring revenue is now getting close to $200 million. And with that also the increase in deferred revenue obviously gave us confidence as early I would say sign of future growth. So at this point, we were quite consistent in previous quarters around 8%, 9%, this quarter even 10%. But let's call it the 7% to 9% CAGR that we were alluding to, as the growth rate of the company, I think it's well backed by the ARR. And by the deferred revenues, that is I would say future looking. And together with that our pipelines today are at record level, some of it because of the delays in closing, but some of it because we continue to enhance pipeline. So looking on everything together, I think the focus that we gave is well [indiscernible] and we have the ARR and deferred even giving us some tailwind for that so we feel confident about it.

Understood. Okay, thank you. That's it for me.

Your next question comes from George Notter with Jefferies.

Hi, guys. Thanks very much. I guess I was looking at the Americas revenue generation. It seems like it's sort of topped out a bit last handful of quarters. I guess I'm just wondering how you guys are doing there. I know hiring has been an issue in general. Any thoughts on sort of North American contribution growth hiring, that would be great. Thanks.

Hi, George. So definitely, we are looking for North America to grow faster, it's clear. We were able actually to bring hiring to where we want it to be. So we closed on the hiring. But obviously those people are relatively new in the organization, most of them are, 3 months, maybe even less 6 months and so. So they will be ramping. Together with this ramp of personnel and sharper focus on cloud security solutions, we believe that we will be able to get North America to faster growth rates. It's definitely in our focus -- definitely in our focus.

And then, is there a headcount number for the company? And can you remind me how many of those new hedge work from Security-Dam?

So, for June 30, we ended with 1,282 employees close to 70. Actually 69 employees came from the Security-Dam side.

Got it. Okay. Thank you.

Your next question comes from Tim Horan with Oppenheimer.

Thanks, guys. Maybe just a little more color on the slowdown. Do you think it's more macro driven or customers maybe just trying to figure out how to reengineer, their whole IT as they move to the cloud? Or is it supply chain driven? I guess those are the three buckets unless there's something else going on.

I want to say macro, because our exposure to all of that is not that high. But if I look on specifically, like three large deals that we had in North America, all of them in the -- each one of them in the millions of dollar range that I -- that I can think of as the prime examples of those delays. So we saw budget freezes towards the end of the quarter that I think is more macro than anything, because we're talking on a very large, successful, profitable growing company. By now, that was actually released and went on. In financial services, we saw a delay in pushing of investments towards even Q4. And in the last case of [indiscernible] infrastructure, it's more scrutiny, more look on architecture, on budgets, et cetera. By now, I think we have a variable for forecasting this quarter. But that's what we've seen in June, beginning of July. So, definitely, some of it is heavily impacted by the macro. But those are not the -- those companies that we work with are the larger enterprise, the carriers, it's not a risk for their business. It's those delays, recession, budgets, scrutiny of the budget that comes into place in those times.

And do you think the supply chain is having any impact on their decisions or your decisions or your revenue? And are you seeing any other real supply chain?

I think the supply chain is not only from last quarter, we've seen it. And on our end, I think we were able to navigate it really well. We increased inventory, Guy mentioned also in his remarks, we were paying more for components, we were suffering in gross margin, but we were able to supply. However, in some cases, we do see that they're building a new data center, the switching equipment is not ready to ship in the next 6 months. They're not taking also our deliverables because they have nothing to do with it without the underlying infrastructure. So there is some, I would say overall delay because of supply chain globally. But that's already built into our guidance, forecast, et cetera, we're seeing that. I would say, that's another good reason to focus in hardware and on cloud security services. It frees us from all those delays and supply chain issues.

Got it. And just lastly, so I know you're kind of talking about the revenue growth, 7% to 9%. Will you kind of be willing to sacrifice margin expansion for a few years to make sure that you're well-positioned longer term. If we're in a weaker environment in the next 18 months, so we expect margins to be down?

We might do that, at least in the short-term that's our decision to continue to invest. Over the long run, I must tell you that with the resumption of sales growth towards the 7% to 9%, I believe you would see delivered in the model [ph]. So I'm not worried about that. We want to bring back the groceries back to our 7% to 9% CAGR, I think the delivery will be seen.

Thank you.

There are no further questions at this time. Mr. Roy Zisapel, I will turn the call back to you.

Thank you everyone for attending and have a great day.

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