Welcome to the Radware Conference Call discussing Third Quarter 2022 Results and thank you all for holding. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, November 2, 2022. I would now like to turn this call over to Yisca Erez, Director, Investor Relations at Radware. Please go ahead.

Thank you, Dinesh. Good morning, everyone, and welcome to Radware's third 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 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 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 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 you all for joining us today. During the last few weeks of the third quarter, we saw closing delays in some customer deals and an increase in multi phased contracts, in response to macroeconomic headwinds. These trends expanded globally and impacted our revenue, which came in below the low end of our guidance. We expect this environment to continue to impact our business in the short term. We continue to track the deals that did not close and at this point, we are not aware that any has been lost to competition. We remain confident in our market position and competitiveness as evidenced by the continued wins we are seeing in large enterprises across all regions. We have a healthy pipeline and we see strong activity level among customers and prospects, which continue to be driven by a significant increase in cyber-attacks. Given that, we're taking several measures to manage the business and leverage opportunities that will position Radware for long-term success. First, we will continue to focus on and cater to the large enterprise market with our state-of-the-art protection. We believe the current environment and spending behavior are temporary and expect to see strong demand from larger enterprises in the future. We believe there are significant opportunities in the market even if the deals take more time to mature. For example, during the third quarter, we closed a multimillion dollar application security deal with a Fortune 500 SaaS company. We won the deal based on our strong partnership and unique application security capabilities. Other examples of large enterprise wins includes a new logo deal with a leading service provider in Latin America for our complete cloud security offering. Our frictionless approach to security was crucial to this customer in protecting the complex environment. In…

Thank you, Roy, and good day, everyone. I'm pleased to provide analysis of our financial results and business performance for the third quarter of 2022 as well as our outlook for the fourth quarter of 2022. Before beginning the financial overview, I would like to remind you that unless otherwise indicated, all financial results are non-GAAP. A full reconciliation of our results on a GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investors section of our website. Third quarter 2022 revenue declined 4% year-over-year to $70.5 million compared to $73.4 million in the same period of last year. As Roy noted, we saw longer sales cycle as well as resizing in some of our large enterprise and carriers customers. As a result of macroeconomic headwind, which affected our revenues across all regions. Revenue in the Americas in the third quarter was $32.9 million, representing 8% decrease in Q3 2022 as compared to Q3 2021. On a 12 trailing month basis, Americas revenue decreased by 1%. EMEA revenue in the third quarter was $22.2 million representing a decrease of 6% when compared to the same period of last year. On a 12 trailing month basis, our revenue grew by 18%. APAC revenue increased by 10% to $15.5 million as compared to Q3 2021 and 3% increase on a trailing 12 month basis. In the third quarter, Americas accounted for 47% of total revenue. EMEA accounted for 31% of total revenue and APAC accounted for the remaining 22% of total revenue. I'll now discuss profit and expenses. Gross margin in Q3 2022 was 82.9% compared to 82.6% in the same period in 2021, an expansion of 30 basis points. Our main gross margin improvement is related to the complete integration of Security-Dam, partially…

[Operator Instructions] And your first question is from the line of George Notter with Jefferies. Please go ahead.

Hi, guys. Thanks very much. I guess one of the things that, that stuck out to me was the annual recurring revenue number. I think I'm looking at $195 million number. I think that's flat sequentially. I assume there's some puts and takes in that number, but can you kind of talk about why that number was flat and you're not seeing growth in that area?

Yeah. In the end, it's -- I would say, it's an outcome of the revenues. And I would say the missing revenues translate to that data ARR (ph). In general, we see continuous growth in cloud ARR and more challenging on the product and services side. But we believe obviously that this result is low and should improve in coming quarters. That's also in line with our increased focus on cloud security that we believe will drive this figure upwards.

Got it. And I assume within that, I guess I assume the maintenance contracts that are inside that number that are on appliances or traditional hardware sales, is that the piece that's sort of softening and that's getting offset by cloud and products subscriptions and therefore you're getting to like a net flat sequential number. Is that the dynamic that's going on here?

That's correct. That’s exact. However, with that, we believe it should grow sequentially and of course, the overall yield. So that is definitely in our model, but we believe that with heightened level of revenues plus even more focused on cloud security as we've noted in our prepared remarks that should drive faster growth of the cloud based to overshadow any decline if happening on the maintenance contract.

Got it. And then can you give us a cloud services and product subscription ARR growth number. I think last quarter you told us it was 18% year-on-year. I'm just curious what that was this quarter?

It was around 12%.

Okay. I'll pass it on. Thanks guys.

Your next question is from the line of Alex Henderson with Needham. Please go ahead.

Great. Thanks. So can you just talk about the -- I know it seems mundane, but obviously, you've got a very large cash balance and with interest rates going up, a 3 point increase in interest rates would add about $8 million here to your numbers, if once it's fully rolled through. Can you talk a little bit about how you expect the interest income line to trend? Is the $2.4 million or $2.5 million (ph) in the third quarter, the run rate and how will it step up as interest rate benefits go through the balance sheet?

Alex, so we expect more or less same income from interest in the coming quarter, $2.4 million, $2.5 million third quarter. We also mentioned in the prepared comments concerned that we will continue to do buyback. So we will use some of the cash for buyback.

So just mechanically, I mean, interest rates have gone up a lot more than 3% and probably be to go up another three quarters today in the U.S. Can you talk about how that -- how you're structured against that? Are you maturities going to roll over the next three or four quarters? We'll have to have a little longer maturities on that those investments are disclosing some sense of it?

Strategically, we're shifting to short term maturity. We are balancing between convertible bonds and investing in just putting the money in banks for six and 12 months, which currently yields even higher interest than bonds that actually feels in our investment policy. So we're shifting more towards short term now.

Okay. So looking out to next year, you're not going to get more -- a nice uptick in the interest income because it's a pretty big number. I mean, we're talking about again, on your cash and then short term investments, a 3 point swing which we've already seen is an $8 million change and it's not trivial. So is that not going to step up $5 million, $6 million, $7 million in ‘23?

Definitely, next year we expect that function in our income from interest. And obviously, it will grow as interest rate, even if interest rates will stay as it is today.

All right. We still have [Technical Difficulty]

[Multiple Speakers] in convertible bonds from the past.

What portion is variable?

What do you mean variable?

Well, we'll roll over the next three to six months.

Let's say about half is still based on, let's say, convertible bonds that still has lower interest rate.

Okay. Thank you. Going back to the competitive landscape, it does sound like EMEA is under a lot of pressure, pretty clear that conditions there are going to get worse over the next couple of quarters as winter comes in and the economies continue to decelerate. So can you remind us a little bit just what your position is in terms of what portion is in EMEA is local currency base and what portion is priced in dollars?

Revenue is all in dollars.

It's 100% in dollars?

Yeah, close to 100%.

Okay. And then going to the operational environment, can you talk about pipeline? And to what extent there's been an erosion in the pipeline or whether that's still robust and how are we set up as we go into the next couple of quarters given the pipeline generally is three, six, nine months kind of structure?

So I would classify the pipeline is very robust. They're going to very close to record levels, if not at that level. And it's driven also by the delays in closing some deals. So it's not only the creation that continues and depends on the region, might be more challenged or less challenged, but also because of delays of closing that obviously increases the current pipeline but overall pipeline is robust. A lot of activity deals that we think are maturing. And as I've mentioned, we did not see competitive pressure or losses on the pipeline. So going forward, at least, trying to not to put aside the sales cycle or the lengthening sales cycle we feel very good about the pipeline.

One last question, when I see before the multi-phase deployment, how big an impact does that how does it, how does it manifest?

I'll give you an example of an expected carrier deal that we had for mobile protection. Initially they were talking about doing 30 MAX (ph) in one shot around $3.5 million product deal. They ended up with saying, okay, we'll do 10 MAX first, one-third, the next year as we deploy the MAX, et cetera, we will do another one and maybe towards the end of the year or the another thing. So they are -- because of supply chain budgets, whatever they are phasing their own deployments and they're phasing our orders. So in that case, a product deal that's generally create immediate impact on revenues, of course, for us, immediate recognition is moving from $3.5 million to $1.2 million.

I see. Thank you.

Your next question is from the line of Tim Horan with Oppenheimer. Please go ahead.

Thank you. I think said some large customers are resizing. I'm assuming they're grooming or trying to cut their expenses. Can you elaborate on that a little bit more?

Yeah, I think. So first, I just gave an example of those phasing, et cetera. We are seeing, for example, customers that instead of taking the full cloud security solution at one shot, they're trying to stage it for cloud, and then some appliances et cetera. We were used to, I would say get all of that in one piece. So it has different shapes and forms, but budget allocation, more lengthening sales and approvals, cycles, all of that we see either of the whole deal pushed or some of the deal getting booked and then delayed. Now we don't see it across the board. We see it in very large deals, the regular mid-sized deals or even medium to large, we did not maybe yet, but we did not experience that. But on the larger commits, in the very large enterprises or areas, that's where we see this phenomena.

Yes. Well, are you seeing existing customers? Are they maybe reducing spend on some of their like or are they trying to reduce what they're spending with you now for existing customers on either legacy products, not new customers existing?

We see that also in large existing ones. For example, the example I gave from the carrier, it's an existing large customer of value, the deployment towards 5G is new. But over there, we do see that phenomena.

Got you. So any idea how long the slowdown can last year, can companies go two years without really investing? Is it two quarter phenomenon, what do you kind of expect on the timing?

So I would split it to where we are thought of a new infrastructure build and then it might be on the long side because it depends on their plans for a new data center or deploying of 5G, et cetera, et cetera. And then I would say, we are aligned to other overall business environment and investment capability, so that's one end. On the other end, when it's serving existing infrastructure and existing business, I don't think it can be delayed too much because the hackers and the cyber activity is there. So you can delay budget, you can try to resize it or to fit more your current needs versus buying for three years ahead of time, et cetera, et cetera, but the investment you would need to make otherwise it would be vulnerable. So I think the heightened cyber activity levels would actually accelerate budget spend in our areas, as long as it belongs to existing infrastructure, existing applications, et cetera, I think it's hard to delay too long.

And lastly, I know you haven't lost any deals, but have you seen a step up in activity on the competitive front either from hyperscalers or any other competitors?

No, no. I think we're doing quite well on the competitive landscape actually. I know it does not show in the current quarter numbers, but in general, we've seen especially in cloud our win ratios going up in the last three, four quarters. So we feel good about the competitive positioning. I mentioned Gartner report, we have other reports attesting to the same and very strong customer references in Gartner, [indiscernible] et cetera. So on all the competitive front, we feel good. We do need to take the steps we've mentioned going more cloud, strengthening the mid-market to accelerate our growth.

Thank you.

At this time, there are no further questions. I will now turn the call over to Roy for any closing comments.

Thank you very much all for attending and have a great day.

This does conclude today's conference call. Thank you all for joining. You may now disconnect.