Welcome to the Radware Conference Call Discussing Second Quarter 2023 Results, and thank you all for holding. [Operator Instructions] As a reminder, this conference is being recorded August 2, 2023. I would now like to turn the call over to Yisca Erez, Director, Investor Relations at Radware. Please go ahead.

Good morning, everyone, and welcome to Radware's Second Quarter 2023 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 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 -- 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 changing or severe global economic conditions, the COVID-19 pandemic, general business conditions and our ability to address changes in our industry, changes in demand for products, the timing in the amount of orders and other risks, difference from time to time in Radware's filings. We refer you to the documents that the company files and submissions from time with the SEC, specifically the company's last annual report on Form 20-F as filed on March 30, 2023. 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. We ended the second quarter of 2023 with revenues of $65.6 million and non-GAAP earnings per share of $0.10. Total ARR growth accelerated to [Technical Difficulty] was $208 million compared to a 5% growth recorded in the first quarter of 2023. Our cloud security business had another strong quarter. Cloud ARR growth accelerated to 23%, reaching $59 million at the end of the second quarter. This strong cloud performance was reflected across multiple metrics, including cloud bookings, new logos and the total number of cloud customers, which all grew double digits. The growing cloud business and the growth in our product subscriptions are gradually forming a sustainable and durable SaaS business model. This progress is reflected in the steady growth in recurring revenue which increased by 7% in the quarter and now accounts for 79% of total revenues as compared to 65% in the second quarter of last year. While the cloud security business produced strong results in the second quarter, the appliance -- encounter strong headwinds, which we believe is a temporary pullback. The spending patterns of large customers have impacted CapEx purchases. Over the last few weeks of the second quarter, we witnessed increased delays in closing large on-prem deals globally, primarily among large enterprises and carriers. To the best of our knowledge, we have not lost [Technical Difficulty] for environment and [Technical Difficulty] we have to be prudent in [Technical Difficulty] expenses. To that end, we have proactively taken steps to optimize and align our costs and maintain stronger profitability. We reduced sales and marketing expenses and reallocated spend towards growth markets in our cloud delivery and go-to-market efforts. Guy will elaborate more on this in his remarks. While large [Technical Difficulty] service providers consider 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 2023, as well as our outlook for the third quarter of 2023. 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 and non-GAAP basis is [Technical Difficulty] issued earlier today and on the Investors section of our website. Revenue for 2023 was $65.6 million compared to $75.1 million in the same period of last year. As Roy [Technical Difficulty] the decline in revenue was due to large enterprises and service providers delaying the closing of large on-prem deals. The behavior pattern intensified in the last [Technical Difficulty] of the second quarter. We believe that some of the [Technical Difficulty] to macro environment and budget constraints. Despite the macro headwinds and in accordance with our strategy, our cloud business continued to perform well also in the second quarter. Cloud ARR in the second quarter of 2023 grew 23% year-over-year to $59 million compared to $48 million at the end of the second -- the end of the [Technical Difficulty] 2022. Cloud ARR accounted for 28% of total ARR compared to 25% last year. The growth of our cloud business is expected in our recurring revenue, which increased 7% year-over-year and now accounts for [Technical Difficulty] of total revenue compared to 65% in Q2 2022. Increase in recurring revenues despite the headwinds that we are witnessing [Technical Difficulty] to more resilient subscription-based business model. On regional breakdown, revenues in the Americas in the second quarter of 2023 was $27 million, representing a 10% [Technical Difficulty] on a trailing 12-month basis, Americas revenue decreased by 6%. EMEA revenue in the second quarter…

[Operator Instructions] We'll take our first question from George Notter at Jefferies.

I guess I wanted to ask about the change in the sales incentive plans. I know that you guys made some changes coming into the year. I know you tilted the plan more away from appliances and towards the cloud business. But is that having an impact on appliance sales? Is that part of the narrative here also? And then on the macro environment, I guess I'm just wondering why you only started to see this kind of towards the end of the quarter? Was there something about the environment that kind of changes the dynamics for you in the marketplace? Or is this something that's been building over time?

Yes. So first, regarding the compensation plan, we did move the [Technical Difficulty] base plan. And I'm sure it had some impact [Technical Difficulty] that's the major one in this regard. It's obvious that our sales force is [Technical Difficulty] and more cloud-based sales like we want them to be. And I don't think [Technical Difficulty] customers that would change the dynamic. It might be more towards the new customers. Our decline came [Technical Difficulty] in customers [Technical Difficulty]. So I don't think that's the main cause. It might have effect like you mentioned in general. But I would not call it a tough one in this area. Regarding the way the quarter progressed, we started with a guidance that we saw took into account. The environment and the challenges [Technical Difficulty] and as we've mentioned, the main difficulties we've experienced were in existing customers where we felt we have good understanding of the environment, process, et cetera. Therefore, we were surprised in the last several weeks of the quarter, although everything was tracking [Technical Difficulty] well all the time to get those pushouts, budget cancellations, et cetera. We tried to take [Technical Difficulty] of course, when we build the guidance for Q3, the phenomena that we saw and to take a way more cautious and conservative view also on the existing customer business, where we feel we are positioned very well. The value is proven. We are blocking attacks in real time. There's a high user satisfaction. As you can see from the ARR, retention rates, so we feel good about our position, but we do need to find a way to accelerate those on-prem purchases also in our existing customers.

And we'll move next to Tim Horan of Oppenheimer.

This is Graham Hawes on the line for Tim Horan. So just on the AI front, I just wanted to hear about what kind of trends you've seen across the security landscape versus this year versus last year? And you mentioned AI with -- some of these cloud DDoS service, and Layer 7 attacks. So I guess kind of how you guys are thinking about the impact of AI to your business kind of over the second half of this year and really going into 2024?

So first, the real-time mitigation, detection and mitigation. On one hand, we are deepening the usage of algorithms constantly. We started with that many years ago. We have a whole battery of different algorithms across our DDoS both API security, that has been for years, our competitive advantage [Technical Difficulty] prepared remarks for Web DDoS, we believe we are in a competitive advantages using algorithms. We are using AI, not only for remediation or accelerating certain processes, but for the actual detection and mitigation. That's a bit unique in the market. So that's on our front. I think it improves our capabilities. It improves our efficacy. It improves [Technical Difficulty]. There's a lot of benefits for AI in our land of security. At the same time, the hackers are also leveraging more and more algorithms, more and more AI. For instance, those Layer 7 attacks, Web DDoS attacks I referred to, they are [Technical Difficulty]. And they are way more real user traffic than we ever saw before. And that poses a huge challenge for the defense because those sessions, this attack looks very, very similar to normal legit traffic. So by using algorithms also on the attacker side, I would say the sophistication, the level of the challenge is increasing significantly. Taking those 2 parameters into account together, I believe the barrier to entry [Technical Difficulty] mitigating real-time attacks is getting higher and higher. You would need to have years of investment in those algorithms, understanding of the attack tools, et cetera, to be able to do [Technical Difficulty] and therefore, competitively, although on one hand, you can say [Technical Difficulty] getting higher, the defense needs to invest more. All of that is true. But competitively, I think it's actually a good phenomena for our [Technical Difficulty].

Got you. And just as one quick follow-up. Just looking at ARR, specifically the non-cloud portion of ARR. It looks like it's kind of fluctuated around that $145 million range. So I'm just curious, as customers move to the cloud, what kind of uplift are you guys seeing in ARR? So for every dollar like non-cloud ARR, what kind of conversion is that to the cloud? And -- or is that not the right way to think about it?

I think there are 3 buckets in our ARR. One is the cloud that [Technical Difficulty] has accelerated. Second is product [Technical Difficulty] software that we sell as a subscription [Technical Difficulty] also growing and has grown nicely in the last quarter and the maintenance of appliances that is more tied to the installed base and so on. Definitely, [Technical Difficulty] traction in all our subscription, product and cloud. That's growing consistently. And I think the maintenance would be more in line with our product sales. In some of our [Technical Difficulty] cloud can bring with them also appliance sales, namely the hybrid DDoS. In most of our business, for example, ADC and DDoS on-prem [Technical Difficulty], those have no relation to the cloud business. It's not cannibalizing nor it's supporting today in the sale of ADC. We are working, of course, to create [Technical Difficulty] between our cloud security to the ADC to the DDoS on-prem to accelerate that. And as the year progresses, I think we will launch several of such modules to create stronger ties between the two. But today, we're enjoying cloud growth that is unrelated basically to the product ARR.

We'll take our next question from Tavy Rosner of Barclays.

Questions. I wanted to touch on OEM and also on EMEA. So I just wanted to check if the traction with OEM is in line with the broader revenue dynamics that we've seen. And I also noticed that the decline in EMEA was a bit cheaper than the rest of the geography. So just wanted to get some color on both of these points, please?

I take the OEM. We actually continue to see good traction with [Technical Difficulty]. We've mentioned in the Analyst Day that Cisco cloud solutions into their -- cloud DDoS solution into [Technical Difficulty]. We're starting to see more activity from our OEMs in the cloud and they continue to contribute good level of new customers, and there's now nice numbers coming from the OEM channel, we're definitely seeing growth year-over-year from that channel.

Tavy and regarding your question about EMEA. So comparing to last year, we had one extraordinary deal in the second quarter of '22, that's one. The second thing, as we mentioned, [Technical Difficulty] due to macro headwinds on large enterprise and some of them were [Technical Difficulty]. All in all, we believe our business is [Technical Difficulty]

And just looking at capital allocation given your significant cash position. Have you considered changing the pace in terms of buybacks and any other considerations there?

So as mentioned, we're running on a $100 million plan. We still have, as of June 30, $35 million. Obviously, prices -- share prices changes [Technical Difficulty] the pace of repurchase will change as well.

And we have no further questions at this time. I'll turn the call back to Roy Zisapel, for closing remarks.

Thank you, everyone, and have a great day.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.