Radware Ltd.

Hello and welcome to the Radware conference call discussing second quarter 2024 results. Thank you all for holding. You will have the opportunity to ask questions to our speakers later on in the Q&A session. If you'd like to ask a question later that time, you can press star one on your telephone keypad. As a reminder, this conference is being recorded July 31st, 2024. I would now like to turn this call over to Yiska Erez, Director, Investor Relations at Radware. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Radware's second quarter 2024 earnings conference call. Joining me today are Roy Zisoper, President and Chief Executive Officer, and Gary Dunn, 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 risks and uncertainties. An actual result could differ materially from Rado's current forecasts and estimates. Factors that could cause or contribute to such differences include, but are not limited to, impact from 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 detest from time to time in rather than filing. 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 20F as filed on March 18, 2024. 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 Zisopel.

Thank you, Iska, and thank you all for joining us today. We ended the second quarter of 2024 with revenues of $67 million and non-GAAP earnings per share of 20 cents, all succeeding the high end of our guidance. These results were driven by our cloud security business, with cloud ARR growing 19% year over year. Strong acceptance of our Defense Pro X DDoS protection and continued OPEX cost control also contributed to our performance. We generated $23 million of cash flow from operations in the second quarter and $44 million in the first half of 2024. During the first six months of this year, cyber attacks continue to rise in number, scale, and complexity. Network layer DDoS attacks per customer increased double digits, and web DDoS attacks in particular continued to climb quadrupling over the second half of 2023. This surge was influenced by geopolitical conflicts and international events, like the EU Parliament elections, Euro 2024, and the Paris Olympic Games. With more attackers using generative AI and AI-enabled attack tools to accelerate time-to-attack and attack progression, organizations worldwide face significantly greater risks to their business operations. To address these challenges, customers need AI-powered protection. In other words, to fight AI with AI. With that, we are proud to introduce our new Radar Epic AI. which powers our security solutions and infuses AI-powered intelligence and capabilities to all layers of our platform. Leveraging state-of-the-art AI and generative AI algorithms, Epic AI is designed to significantly improve attack detection and mitigation capabilities and reducing time to resolution. Epic AI introduces new AI algorithms, such as cross-module attack correlation, both behavioral algorithms, and automated false-positive auto-correction. It also includes a new API business logic protection algorithm. Unlike competitive solutions that rely on past attacks log analysis for detection and remediation recommendations, Our AI-powered API protection works automatically, continuously, and in real time to identify bad actors and block their attacks. For our customers, this translates into optimized protection and significantly faster time to resolve. We are pleased to announce that analysts recognize the strength of our AI capabilities. In May, GigaOM evaluated the AI protection capabilities of 13 security providers in our space in the 2024 Radar for Application and API Security Report. In the report, GigaOM stated, Radware is the only vendor in this analysis to earn a top score on the AI-enhanced vulnerability detection criterion. Radware includes everything that we currently look for in this feature. In addition, Delta 2024 Peer Insight Voice of the Customer Report for Cloud Web Application and API Protection named us a strong performer, noting that 99% of customers are willing to recommend Radwin. To continue to meet our customers' evolving security and infrastructure needs, we accelerated our pace of innovation. During the second quarter, we added numerous new capabilities to our cloud security platform. We expanded our cloud platform with a DNS as a service capability and with our NoKey solution for privacy protection, storage, and management. We also introduced a new compliance solution to help organizations easily navigate and streamline the process of meeting PCI DSS 4.0 requirements. This new pillar for our cloud application protection service offers customers dedicated controls, extensive visibility, and easy-to-access reports. The PCI DSS regulation went into effect on March 31, 2024, and will become mandatory starting March 31, 2025. To support our growing cloud customer base, we launched a new cloud security service center in Paris. The facility will help customers increase resiliency and comply with local data privacy requirements. The launch extends our DDoS and web application attack mitigation capacity to 15 terabits across more than 50 cloud security service centers worldwide. We plan to open three to four additional centers by the end of 2024. We believe that Epic AI and the additional modules in our cloud security platform increase the business value our customers extract from our solutions. Going forward, we expect these benefits will generate more traction for our offering, increase our ARR, and enhance platform stickiness. In our on-premise security business, we also see encouraging momentum. Defense Pro X, with its superior DNS and web DDoS mitigation capabilities, is gaining strong market traction. For example, we closed a multi-million dollar deal with one of the largest stock exchanges in Europe. The customer recognized the need to protect the network and applications from both volumetric and web DDoS attacks. The combination of our new AI-powered DNS protection, with Defense4x's performance convinced them of the necessity to upgrade their current infrastructure. Our ability to mitigate sophisticated Layer 7 DDoS attacks without the need to hand over certificates was another key motivating factor in their purchasing decision. Defense4x also earned us new logos, and a good example is a European insurance institution. The customer was interested in enhancing protection for their services and infrastructure, and Defense4X provided crucial protection that the incumbent could not offer. This deal was part of a broader Cisco project. In summary, although customer spending patterns have not yet returned to previous levels, we delivered solid results for the second quarter. We are excited about the momentum in our on-prem security business as well as the advancements in our cloud security strategy, particularly with the launch of our new APKI. Looking out into the second half of 2024, we remain focused on accelerating our cloud business and believe we're well positioned for future growth and increased profitability. With that, I will turn the call over to Guy. 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 2024, as well as our outlook for the third quarter of 2024. 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 a GAAP and non-GAAP basis is available in the Earnings Press Release issued earlier today and on the Investors section of our website. Revenue for the second quarter of 2024 was $67.3 million compared to $65.6 million in the same period of last year. This growth was mainly driven by cloud security business expansion and DefenseProX success with our carriers and large enterprise customers. The cloud security business expansion is reflected in the 19% year-over-year increase in cloud ARR, which reached approximately $70 million and accounted for 32% of total ARR in the second quarter of 2024, up from 28% in the same period of 2023. Our total ARR reached approximately $217 million, representing 7% adjusted growth over the same period of last year. Over the past few quarters, we witnessed signs of recovery in customer spending, although it has not yet returned to previous levels. On a regional breakdown, revenue in the Americas in the second quarter of 2024 grew 12% year-over-year to $30.1 million and accounted for 45% of total revenue. On a 12-month trailing basis, American revenue decreased 10% year-over-year. May revenue in the second quarter of 2024 was $22.8 million, representing 1% year-over-year increase and accounted for 34% of total revenue. On a 12-month trailing basis, INEA revenue decreased 9% year-over-year. APAC revenue in the second quarter of 2024 was $14.4 million, which represented a decrease of 11% year-over-year and accounted for 21% of total revenue. On a 12-month trailing basis, APAC revenue increased 1% year-over-year. I'll now discuss profits and expenses. Gross margin in Q2 2024 was 82.2%, approximately similar to 82.3% in the same period of 2023. Operating expenses decreased 6% year-over-year from $52 million to $49 million for the second consecutive quarter, at the lower end of our guidance. Operating income reached $6.3 million compared to $1.9 million in the same period of last year. We are selectively adding investment to accelerate cloud security growth in R&D to increase our technology mode, go to market and infrastructure. Yet, we remain dedicated to driving efficiency and EPS growth and diligently managing our expenses. Ruddworth's adjusted EBITDA for the second quarter has doubled to $8.3 million or $11 million excluding the Hawks business compared to $4.1 million or $6.8 million excluding the Hawks business in the same period of last year. Financial income was $4.1 million in the second quarter. The tax rate for the second quarter in 2024 was 15.4% compared to 14.8% in the same period of last year. We expect the tax rate to remain approximately the same next quarter. That income in the second quarter nearly doubled to $8.8 million as compared to $4.5 million in the same period last year. Diluted earnings per share for Q2 2024 doubled to $0.20 versus $0.10 we had in Q2 2023. Turning to the cash flow statement and the balance sheet. Cash flow form operation in Q2 2024 was $23 million compared to cash flow form operation of $4.9 million in the same period of last year. This brings cash flow from operation year-to-date to $44.2 million. Improvement in the cash flow from operation is mainly attributed to the increase in net income along with strong billing performance in the second quarter of 2024. As of June 30, 2024, approximately $66 million remained in our share repurchase plan. We ended the second quarter with approximately $397 million in cash, cash equivalent, bank deposits, and marketable securities. I'll conclude my remarks with guidance. We expect total revenue for the third quarter of 2024 to be in the range of $67.5 to $69 million. We expect Q3 2024 non-GAAP operating expenses to be between $49.5 to $50.5 million. We expect Q3 2024 non-GAAP diluted net earnings per share to be between 19 and 21 cents. I'll now turn the call over to the operator for questions. Operator, please.