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spk02: Ladies and gentlemen, thank you for standing by and welcome to the Radware Q3 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. And I'd like to hand the conference over to Ms. Anat Yaron-Heilborn, VP Investor Relations. Please go ahead.
spk00: Thank you, Sharon. Good morning, everyone, and welcome to Radware's Third Quarter 2020 Earnings Conference Call. Joining me today are Roy Zisopel, President and Chief Executive Officer, and Dorona Brumovic, Chief Financial Officer. A copy of today's press release and financial statements, as well as the investor kits 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 risks and uncertainties, and actual results could differ materially from Radware's current forecast and estimate. Factors that could cause or contribute to such differences include, but are not limited to, impacts from the COVID-19 pandemic, general business conditions, and our ability to address changes in our industry, changes in the map for products, the time and the amount of orders, and other risks detailed from time to time in Redwood'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 2nd, 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 management will virtually participate in the Bernberg CEO Conference and the Needham Network and Security Conference in November and in the Raymond James Technology Conference in December. I will now turn the call to Roy Disabel.
spk09: Thank you, Anant. We are pleased to deliver another quarter of solid results. We enjoyed strong road-based booking growth spanning across all our geographic regions and product lines. and across all components of our data center and application security offerings. DDoS, web application firewall, bot management, and cloud workload protection. As a result, our book to build was above one, and we benefit from increasing visibility for the coming quarters, despite the obvious challenges in the business environment. With regards to our cloud solution and product subscriptions, we saw continuous robust performance. This is reflected in our year-over-year ARR growth. For the third quarter, ARR reached $169 million, with growth rate accelerating to 12%, up from 10% in Q2. The main driver for this growth was cloud and product subscription ARR, which grew approximately 30% year-over-year. The GDPR transformation is accelerating. Users move to work from home, utilizing personal computers and mobile devices. At the same time, applications are moving more quickly to the cloud. These trends create an expanded attack surface. On the backdrop of this phenomena, the attack landscape continues to be very active, and traffic through our cloud security infrastructure reach all-time highs. In the third quarter, the number of DDoS attacks blocked by us was more than two and a half times larger than in the second quarter. And the volume of DDoS attacks blocked more than doubled. The total number of web application attacks blocked in the third quarter increased approximately 40% sequentially over Q2. These extensive level of attacks illustrate the need for a comprehensive security strategy that protects and secures the infrastructure and critical business applications, whether they are on-premise, in the cloud, or operating in a hybrid environment. It is this increased need for our holistic security portfolio that has provided us with opportunities to expand our presence with existing customers, as well as winning new business. For example, during August, A large-scale ransom attack forced the stock exchange, which was not a Radwell customer at the time, to halt trading for three days. Despite being protected by a competing cloud leader solution, the service failed to stop certain attack vectors. We deployed our defense pro-attack mitigation appliances in a very short time, and the attack traffic was immediately blocked. As a result, we secured an order early in Q4 through our strategic partner, Cisco. We are addressing this increased demand by further investing in our own infrastructure and operations. As we announced in late August, we recently added three new scrubbing centers in India, Brazil, and Israel, expanding both our geographic coverage and our total capacity. We also expanded and enhanced our main security operation center, tripling its size and equipping it with state-of-the-art monitoring and control systems. We continue to broaden our offering to deliver on our vision of a highly differentiated, full-stack application security offering, utilizing advanced algorithms across our portfolio. In June, we announced API protection capabilities, applying machine learning on API calls, and providing us with a highly differentiated capability. Recently, we announced that we developed a new set of behavioral algorithms to protect against sophisticated attacks in online gaming. This meets the specific needs of this sector for protection from UDP attacks, which is the core protocol used in these applications. We believe our investment in algorithms continues to provide us with significant competitive differentiation for the effectiveness and accuracy of our security solutions. Moving to the customers and sales front, in the third quarter we saw several multi-million, multi-solution cloud security deals, including a major win with an online trading platform we announced last month. Our OEM relationship continued to perform well and delivered record booking for the quarter. We continue to win new customers through these relationships, including Fortune 500 levels. One such win was with a Fortune 50 leading healthcare company that selected to displace its existing security solution with rather cloud DDoS protection services across six data centers globally. Last month, we announced our new reseller relationship with Airtel, India's largest integrated telco. Airtel is now offering Radware Cloud IDOS protection, Cloud WAF, and Bot Manager cloud security services to its enterprise customers. Under this agreement, we've already secured our first joint deal, and we're looking forward to securing many more. In summary, While the level of macro uncertainty is high, our visibility continues to increase, supported by increased backlog and accelerating ARR growth. With the rapidly accelerated digital transformation, cloud migration, and remote worker initiatives, the attack surface has expanded and cyber activity is at all-time high. Our comprehensive and differentiated data center security offering addresses the critical business need for continuous data center and application security and delivery. Our focus on large enterprises and carrier segments and leveraging our key strategic partners' market access creates for us a robust market demand for our solutions. All these position us very well for the future. I will now turn the call to go on.
spk08: Thank you, Roy. We are pleased with the results of the third quarter, which were achieved in an environment that continues to be challenging, with countries and regions going in and out of lockdowns or other limitations, leading to continued uncertainty. Our organization continues to perform well under these circumstances across all functions, and we are pleased with the way our employees adapted to the operational and business environment. Revenues for the third quarter were $62.5 million, 1% below Q3 2019, and in line with our guidance. From a geographic perspective, revenues from the Americas reflected a healthy demand environment. Q3 America's revenues increased 24% from last year to $30.2 million, and nine months America's revenues increased 13%. Revenues from the EMEA region decreased 5% from Q3 last year to $18.3 million, and nine-month revenues decreased 1%. Revenues from Asia-Pacific decreased 27% from last year to $14 million, and for the nine-month period decreased 25%. Our cloud and product subscription revenues, together with maintenance revenues, comprise our recurring revenues. In Q3, recurring revenues were 63% of total revenues, reflecting high product delivery. For the first nine months of 2020, recurring revenues were 66% of total revenues, compared to 64% in the first nine months of 2019. ARR, which normalizes timing differences in booking, invoicing, and revenue recognition, reached a record $169 million for September 20, increasing 12% over September 19. This growth represents the highest of our underlying performance. Within the total ARR, cloud services and product subscription ARR grew approximately 30% year-over-year, reflecting the growth drivers for the company. The total deferred revenue balance with approximately $172 million. Out of the total balance, 63% or approximately $108 million is due for recognition in the next 12 months. We have been providing total deferred revenues in the past few years as a leading indicator for future growth. We believe that ARR is more industry standard indicator that is more appropriate given the increased proportion of subscription revenues and the decreasing proportion of appliance sales. We will therefore stop discussing total deferred revenue starting next quarter and will regularly provide ARR information. I will now discuss expenses and profits, all in non-GAAP terms. The differences between the GAAP and non-GAAP results for the quarter are detailed in our parcel list. Growth margin for the third quarter was 82.2%, reflecting product mix and higher proportion of subscriptions. Let me remind you that our cloud subscriptions are actual services that are accompanied by costs, especially when we open new scrubbing centers or increasing capacity across our cloud network. Operating expenses in Q3 were $44.5 million, up 3% from Q3 2019. The majority of the increase is a result of higher high-con expenses, including commissions offset predominantly by lower travel expenses. We ended the quarter with 1,125 employees, up by 54 employees compared to a year ago. Operating profit and margin in Q3 2020 were $6.9 million and 11%, respectively. Net income for the third quarter was $8.4 million, or 18 cents per diluted share, at the high end of our guidance. Turning now to the balance sheet and cash flow items. Net cash provided by operating activities was $7 million for the third quarter and $50 million for the last 12 months. During the quarter, we repurchased approximately 626,000 shares for a total of approximately $16 million. In the first nine months of the year, we spent approximately $40 million on share buybacks And at the end of September, we had approximately $36 million available for continued purchasing. We ended the quarter with approximately $437 million in cash and financial investments. Most of our cash is invested in highly liquid US dollar, marketable securities, and deposits. I will move to our guidance for the fourth quarter of 2020. We expect Q4 revenues to be between $66 and $69 million, leaving full-year revenues to be between $247 and $250 million. Q4 operating expenses are expected to be between $46 and $47 million. We expect to see a continued impact of higher headcount costs, partially offset by lower travel expenses. In addition, Q4 will factor a moderate FX impact. Although our financial income for Q3 2020 reflects a favorable investment portfolio performance, we will expect a decline in the coming quarters, giving lower yield on new marketable securities. We expect EPS for Q4 to be between 21 and 24 cents and full-year EPS to be between 65 and 68 cents. I will now open the call for Q&A.
spk02: If you'd like to ask a question at this time, please press star 1 on your telephone keypad. If you'd like to return your question, press the pound key. First question comes from George Notter with Jefferies.
spk04: Hi there. Thanks very much, guys. I guess I wanted to ask about the the differential in growth rates across your America's business. I think you said 24% year-on-year. Obviously, APAC was where Samia was in the middle. I know you guys are investing fairly aggressively in North America in particular, and can you talk about those investments and how they're translating into the additional revenue growth and, you know, does this kind of open your minds to investing more aggressively in other parts of the business as well? Any thoughts there would be great. Appreciate it.
spk09: So I think in general, you know, obviously we're very satisfied with our performance in North America. I think the investments that we've done and we shared already in February, if you did, and that coupled also with the U.S., at least from our point of view, was hit less on the business side from COVID-19 versus what we've seen internationally, lockdowns and the and the way also the other governments reacted on the business side. I think also in the U.S., the investments in cybersecurity and cloud are in a heightened level and have accelerated significantly, which also contributes nicely to our performance. So our plan is to continue to increase investments in North America, given the growth and given that we think the potential for us is extremely high, almost unlimited versus where we are now. And we're planning to add more resources across both our direct Salesforce, our OEM, our OEM channel, and the cloud reselling partners. So across all the growth drivers we're sharing as part of our strategy. As it relates to the international, I've mentioned in our prepared comments that, you know, in Q3, we already saw all our geographies growing year-over-year in bookings. It's not yet in revenues, but obviously if this trend will continue into Q4, you will start seeing that also in the P&L. So as long as the business climate... the international market stays as is, we're also optimistic that our performance there will improve.
spk02: Next question comes from Alex Henderson with Needham.
spk05: Great. Thank you very much. I was hoping you could talk a little bit about the U.S. business split between what I think is probably some strength at Cisco and whether that is part of what drove the acceleration and whether, you know, how much is more organic Radware. And I've got some follow-ups.
spk09: Yeah. So the growth in the U.S., not only in the third quarter, but throughout the year, definitely we're seeing Cisco ramping up significantly, as mentioned, probably every quarter. I want also to highlight the Checkpoint relationship, another record-booking quarter from Checkpoint. As I've mentioned, it was a record-booking quarter for all OEMs. So that is helping us. But a lot of the growth is coming also from our organic wins there. So it's really the fruits of all the strategy taking place, and as I've mentioned, we are very satisfied with the results and believe we should put more resources behind it to continue.
spk05: On the Cisco front, do you think the 7% risk that they are doing will help you or hurt you as the company grows? shifts resources and shifts focus. Any sense of whether that's a tailwind or a headwind?
spk09: So early to say, but definitely the direction they're taking, the high-level strategy to focus more on applications and more on security should help us because this is exactly the area we focus on and where we are completely complementary to their portfolio. So the high-level strategy, I think, fits us very well. We need to see how the risk, you know, affects their performance. But, again, our ability to our number in Cisco can grow significantly. The potential is huge. And we're starting to win, as I've mentioned in my comments, more and more fortunes. Fortune 50, Fortune 500 customers with them as we're seeing increased activity with their sales force.
spk05: Great. If I could ask one last question and then I'll see the floor. I know you don't want to give guidance past the current quarter, but strategically the logic behind your spending and growth outlook into 21, it seems pretty clear that you had intended to accelerate spending in 2021. and because of COVID slowed that somewhat, I would assume that you will see an acceleration in investment as we go into 21, and then also see some T&E coming back. So should we expect the OPEX growth in 21 to put a little bit of a crimp on the operating margins in that year, or should we Assume that you're going to be, as you've historically been, more careful on the mechanics of your investments so that you continue to deliver some margin rebound.
spk09: So while I think we will continue to be conservative on investments, I think especially in North America and especially as it relates to our OEMs and cloud security offerings, I it's the time to continue to invest. So we don't give guidance yet on all those parameters you've mentioned, but directionally, OPEX will grow, especially in these areas, in these investments, because we see very good returns. I think ARR is a good directional parameter to follow, and we want to put more support behind this growth.
spk02: Thank you very much. Next question comes from Yi-Fu Lee with Oppenheimer.
spk01: Thanks for taking my question and hope everybody's safe and healthy. Well, can I just ask, maybe start with you first, a more broad-based macro question. We've seen America's grown fairly healthy at 24% year-over-year. But can you give us more color? Were there any pull forward from the June lockdown we're seeing with other vendors in America? And also some commentary, Roy, on maybe the Amlia, because we're hearing a second wave lockdown in, let's say, the UK. And also anything on the timing of APAC. And then I have a quick follow-up for Duran as well.
spk09: Sure. Can you just repeat your question on the U.S., whether there were... Yeah, were there any pull-through from the June lockdown?
spk01: Because we've seen other vendors that in late June in America, like some states like California, there were like lockdown, extended lockdown measures, I would say, in June. Were there any pull-throughs from the second quarter to the third quarter in America that drove the very healthy year-over-year increase? And maybe some commentary on the EMEA and APAC region would be helpful, right?
spk09: Okay. So nothing specific that I can share. And also in our last quarterly result, it's not that we mentioned slip deals in North America. North America performance for us for several quarters now has been strong, and we continue to see very – good levels of activity and win ratio coming from that theater. Regarding INI and AIPAC, over there the situation is a bit more complex, as different countries behave differently. And also forecasts in these countries are changing quite dynamically as they move to second wave, third wave, new lockdowns and so on. I'm sure you follow the news from Europe in the past several weeks, which makes all the environment obviously less strong for us. Having said that, you know, in Q3, and also our expectations for Q4 are quite good in the international theater as well. So we do see a rebound of business activity, and to the point it will persist more than one quarter, maybe two or three quarters, it's definitely going to flow into the P&L. So I don't see any worsening conditions internationally. Actually, in Q3, we saw very good improvement, and we're looking forward to go back to previous business levels and beyond there as well.
spk01: Thanks for that commentary, Roy. And then, Duron, can I just follow up with the investments in the expansion of the scrubbing centers, in particular the emerging markets like India, Brazil, and the dealer markets in Israel? Can you give us a little colors on some of the greenfield opportunities in the emerging markets? And was Airtel Partnerships a big contribution to, you know, the performance in some of these regions? Anything on that would be helpful. Thanks, Doron.
spk09: So I'll take that on the customer side, and then maybe Doron will add some comments. So first on customers, what we see with some of our global customers is we need to cover, as I've mentioned, Many data centers across the world, when you take a global Fortune 50 or a very large manufacturing company and protect all their facilities, is in many cases they do have additional data centers in countries such as Brazil and operations in India. And then our ability to serve them also locally is of significant competitive advantage. So the opening of these additional data centers is coming from two directions. One, of course, we want to serve the local market and many local markets today taking data And user private information out of the country is not allowed by the regulators. So especially as it relates to local government, financial institutions, and so on, you do need local facilities. In addition, the global companies, when we are signing global deals, it's becoming more and more needed and a competitive advantage to have that global presence. And we've acted based on that. So both to our India... and the Brazil data centers, we already have tenants based on these two. Specifically to India, we are also extremely encouraged by the Airtel partnership. We became their solution for Cloudidos, CloudOS, Cloudbot. And if you follow their announcements, they announced a new theme. They call Airtel secure. And they named two strategic partners, Cisco and Radwell, as part of this strategy. Airtel is the largest business telco in India. They have very high plans in terms of security overall and cloud security specifically. And we are very enthusiastic about this partnership, and we will update you in the coming quarters about our progress. I think it's material to our ATAC business.
spk01: Thank you very much, Roy.
spk02: Next question comes from Andrew King with Collier Securities.
spk06: Thanks for taking my question. So with the approaching holiday season, I just wanted to get an idea of where you see the opportunity with the bot attacks, especially with you just announcing the bot manager for Salesforce Commerce Cloud. Can you guys hear me?
spk02: Presenters, you're connected.
spk09: Okay. Can we get the additional questions?
spk02: Mr. King, please repeat your question.
spk06: Yeah. So just with the approaching holiday season, can you guys Give us a little bit more color around the opportunity with the bot manager and the bot attack, especially with you guys just announcing the bot manager for Salesforce Commerce Cloud.
spk09: Yeah. So, you know, the bot management space in general is targeting the automatic robots that are imitating real user traffic. In that sense, they are expanding our security portfolio and the problems we solve to more business-related problems, like account takeover, like page scraping, and so on. The attacks that we're seeing in the bot space are not, the traffic itself is not malicious. It's the intent that is malicious. And hence, you know, the conversations are spanning both security and business, or application-business logic conversations. We're seeing very nice updates for our customers of WAF and Beagle, buying also those additional bot capabilities from us. We think that our product, which is, again, based on machine learning and algorithms, is doing extremely well. And we think that opportunity will just grow. Within the coming years, the market is still small, but growing quickly. And if we tie both the web application security as well as the API security, definitely we are satisfied with our position and the growth we're seeing in that area of our business.
spk06: Great. And then just looking at the OEM space specifically, in the past, you've really been focusing your investments into the Cisco relationship. Can you give us an idea of going forward if you're going to shift more of those resources and investments into the Nokia and Check Point relationship? Or will you stay focused on Cisco?
spk09: And so based on the results we've seen, and I've mentioned several quarters in a row to the other OEMs, We continue to add investments, both to Cisco, to Check Point, and to Nokia. So we don't think those are mutually exclusive investments. Actually, you know, we see Cisco and Check Point relationship at the end customers quite complementary for us because generally when Cisco security is the large security architecture player in a customer, it means that Check Point has a smaller role and vice versa. Because generally, if you look on the Fortune 500, many of them would be either or and not the two vendors together. And therefore, we can invest in parallel in both relationships and enjoy both with them in getting better access to the end customers.
spk07: Got it. Thank you.
spk02: Next question comes from Tavi Rosner with Barclays.
spk03: Hi, this is Chris Reimer on for TAVI. Thank you for taking my questions. I wanted to ask, following on the previous question relating to geographies, especially the decline in APAC, can you clarify if you're seeing some long-term trends there or is it all just near-term volatility?
spk09: We think from a booking perspective, this year would be growth over last year. As it relates to our booking, I do see already an improvement. We did suffer in the first half of the year, and especially in Q1, I would say more. But since then, we do see recovery. Not in all countries yet, but I would say in the major markets, we do see business is coming back. So I don't see that as a long-term issue, and we look forward to bringing back growth also in the P&L, also in the revenue recognition in Apex.
spk03: Okay. And just regarding your cash position, over $400 million, Can you give any color or do you have any views on M&A?
spk09: So we continue to be active in the market, looking for M&A, especially, you know, as it relates to enterprise security, cloud security spaces. And we will update when we will have something specific to report. But it's definitely one of the pillars of our strategy. We think there's a good opportunity and beyond the organic wealth to add to M&A, and we are looking for that. In parallel to that, you can see that we've heightened our buyback spend this year for $60 million, so basically 100% of the operating cash flow and a bit more of that we're utilizing for these buybacks.
spk02: Okay, that's helpful. Thank you very much. Next question comes from Joshua Tilpon with Berenberg.
spk07: Hi, guys. Thanks for taking my question. Just a quick one, and apologies I didn't catch this, but can you just repeat what the recurring revenue or the percentage of total revenue was in the quarter and what it was in Q3 last year?
spk08: The recurring revenue was 52%. In the first nine months, it's 66% up from last year.
spk07: So the 64% was for the first one last year. That's on the first nine months or just in the quarter? Yes. First nine months was 64%, now up to 66%. Okay. That was helpful. By any chance, did you disclose what the percentage in the quarter was last year?
spk08: Last year, it was around 66% to 67%. But overall, we mentioned that this year we are planning to get more than 65%. It's a fluctuated issue. I mentioned in my previous comments that we had certain large deals that... with a higher product component, so it drove the whole work to be in this area of 63%. So this is why we obviously gave the nine months, and here you see the obvious trend started years ago with 42%, and now we are in the neighborhood of more than 65%. This particular quarter, we are a bit down, but again, because of this few years, That was very helpful.
spk07: Thanks for the clarity.
spk02: And at this time, I'll turn the call over to Mr. Tisapel.
spk09: Okay. Thank you very much, everyone, for attending, and have a great day. Thank you.
spk02: This concludes today's conference call. You may now disconnect.
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