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Radware Ltd. (NASDAQ:RDWR)

Acquisition of Strangeloop Networks Conference Call

February 8, 2013 8:45 am ET

Executives

Meir Moshe – Chief Financial Officer

Roy Zisapel – President and Chief Executive Officer

Analysts

Michael Saloio – Oppenheimer Securities

Alex Henderson – Needham & Co. LLC

Rohit Chopra – Wedbush Securities, Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Radware Investor Call. At this time, all lines are in a listen-only mode. Later, we’ll have a question-and-answer session. Instructions will be given to you at that time. (Operator instructions) And as a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to Meir Moshe, Chief Financial Officer. Please go ahead.

Meir Moshe

Thank you. Good morning, everyone, and welcome to Radware investor conference call. Joining me today is Mr. Roy Zisapel, our President and CEO. First, I would like to review the Safe Harbor language. During the course of this conference call, we make projections or other forward-looking statements regarding future events or the future financial performance of the company.

We wish to caution you that such statements are just predictions and that actual events or results may differ materially, but are not limited to general business conditions and our ability to address changes in our industry, changes in demand for products, the timing and amount of orders other risks detailed from time-to-time in Radware’s filings.

We refer you to documents the company files from time-to-time with the Securities and Exchange Commission, specifically the company’s last Form 20-F, filed in March 2012.

And now, I would like to turn the call over to Roy.

Roy Zisapel

Thank you, Meir. Today I’m delighted to announce that Radware has acquired Strangeloop Networks, a leader in the Web performance optimization domain.

After I discuss the key updates, Meir will review the financial terms and after that we’ll the open the discussion for Q&A.

Over the last couple of years, we’ve observed the shift and our enterprise users are using and expecting the web applications to perform. Until recently, the majority of enterprises were located either in corporate headquarters or in branch offices. Accessing internally deployed applications are done inside the enterprise data center.

However, this paradigm has changed to a great extent. Today the enterprises are characterized by strong adoption of software-as-a-service and cloud-based services, creating a new reality with the distance rapidly lengthening between end users and the applications they are accessing. In addition, mobile workforce is rapidly growing to a point where employees, partners and customers will likely access the enterprise web applications from anywhere in the world and not from their PCs at corporate headquarters or branch offices.

As the distance between end users and the applications grow, network latency significantly increases, degrading end-user quality of experience and risking employee productivity. Add to that the increased complexity of web application delivery as more employees are accessing the web applications via various end user devices, be it laptop, tablet, smartphones, et cetera. Plus, today modern web applications are becoming more complex in terms of higher payloads and longer rendering times. These applications are often not designed for access by mobile devices. To overcome growing latency and mobile application delivery challenges, a technology to accelerate web application response time is required more than ever today.

Online businesses, especially e-Commerce, e-Retail and online financial services are highly dependant on customer facing web application, as this is how they actually interact with their customers. And more importantly, this is how they generate revenues. For these customers, fast web application performance directly impacts customer satisfaction, conversion rates and the bottom-line, indicating a strong need for web performance acceleration solutions.

Recognizing these three requirements, we made a decision to acquire Strangeloop Networks, a leader in the web performance optimization domain. For over six years, Strangeloop has developed their market leading web performance optimization solutions. These few proven solutions have been deployed in numerous high profile organizations including Petco, O'Reilly, Visa, Wine.com and others. Customers such us these benefit from the fastest end-to-end web application response time, allowing them to increase online revenues and improved customer satisfaction and loyalty.

These strategic moves strengthened Radware position as a leader in the application delivery industry by adding a unique web application response time optimization offering. We see this acquisition as a natural step for us and one that will position Radware as the only vendor to deliver both best-of-breed application delivery and advanced web performance optimization solutions.

I’d like to discuss more about the acquired Strangeloop offering. Strangeloop co-offering is called Site Optimizer, which is a solution for accelerating online business websites and enterprise web applications out-of-the-box. The solution employs best-in-class web optimization capabilities and is available in three different form factors to accommodate flexible deployment models.

The form factors include the physical appliance, a virtual appliance and the cloud service. In addition, it features unique mobile optimization capabilities for the acceleration of service access by mobile devices. The products will be now offered under the Radware FastView brand name. Future development plans also include integration of the Strangeloop technology into Radware’s industry-leading Alteon application delivery controller for offer as an integral software module. This will further differentiate our Alteon application delivery controller, enhancing it as the leading solution in the market.

And now, I’d like to turn the call over to Meir to discuss the acquisition financial terms.

Meir Moshe

Okay. Ladies and gentlemen, for the transaction now, the Radware base for the 100% of the Strangeloop equity, $8.4 million in cash and up to additional $6 million as an [aeronaut]. Company’s headcount will increase by approximately 20 employees. Following the transaction, we expect marginal contribution to revenues in 2013 and ramp up of revenues during 2014. Therefore, non-GAAP EPS will be dilutive by $0.03 in the first quarter, $0.02 in the second quarter, $0.01 in the third quarter, break-even in the fourth quarter of 2013 and accretive in 2014.

And now, I’ll turn the call again over to Roy.

Roy Zisapel

Thank you, Meir. In summary, we see the Strangeloop acquisition as a strategic move for Radware, further allowing us to address today’s top web application performance challenges. We believe that with this new unique technology, we can further differentiate our application delivery offering and grow our market share.

And with that, I would like to open the discussion for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question will come from the line of Michael Saloio with Oppenheimer. Your line is open.

Michael Saloio – Oppenheimer Securities

Hi. Thanks for taking my question. I was wondering if you could go into a little bit more detail on the go-to-market strategy of the product as it stands today. And then, as a follow-up to that, could you give us a better idea of kind of what the integrated product will look like in the future and how long it’s going to take to roll something like that out?

Roy Zisapel

Okay. So the current product is sold in three form factors. The first two are appliances and virtual appliances and sold as a product sale to the target customers. The third form factor is cloud service that is sold as a subscription. We intend to keep all three form factors and in the future also offer the technology as a module-integrated as part of our Application Delivery Controller. We believe that the integrated version will go out in Q4 of this year.

Michael Saloio – Oppenheimer Securities

Okay. Did they sell their products primarily through the channel right now or is it a direct sale?

Roy Zisapel

It’s primarily through channel. Although, the current sales, as Meir mentioned, are very low. So it’s a channel product sale. The cloud service is a direct one meaning the customers are subscribing directly with Strangeloop.

Michael Saloio – Oppenheimer Securities

Okay. And you mentioned that you’ll be the only, one of the major ADC providers to have both services. So does that mean that none of your other competitors have a product like this now and who are some of the competitors, competitors with Strangeloop now?

Roy Zisapel

So as far as we see, none of the competitors that are competing with us in the ADC market as such a solution today. There is a couple of private companies that were competing with Strangeloop and there’s also, as I’ve mentioned, cloud services that can be used to accelerate application. But generally, the way people were optimizing response time in the web application was through an internal development. So they were using their development teams to optimize, especially as it relates to online retailers, online banks and online commerce. They were using their internal development teams to optimize the websites for performance.

What we are offering through this acquisition is an automated tool that allows out-of-the-box to reach a very strong acceleration solution without the need, every version or every update to your website to continue invest R&D resources. So, specifically for the mid-year of the online retailers that could not afford dedicated teams for performance optimization, this is a great solution that puts them on par with the larger shops and for the larger shops that’s a great tool to extend performance optimization to all the web properties and save a lot of the development, cycles and time to markets.

Michael Saloio – Oppenheimer Securities

Yeah, that’s really helpful. And then I just have one last question. I see they have a network accelerator product that looks like it’s also sold to service providers. Could you just give us a little bit more color on what your plans are for that product, and then what type of service provider, a product like that would be sold to?

Roy Zisapel

This is more of a future product that they have. It’s currently not in GA, and we will be looking of course to leverage this technology, the FastView technology across multiple target markets and target applications in the future, one of them can be also service providers.

Michael Saloio – Oppenheimer Securities

Okay, that’s it for me. Thank you.

Operator

Thank you. Our next question will come from the line of Alex Henderson from Needham. Your line is open.

Alex Henderson – Needham & Co. LLC

I might have missed this, but did you give a revenue number for 2013 or 2014 for these products, I assume there was very little revenue associated with it?

Roy Zisapel

Yeah, for 2013, it’s really marginal. In our number, and we believe that in 2014, it would start to scale.

Alex Henderson – Needham & Co. LLC

Okay, so we’re just basically accelerating the cost by adding 20 employees. The second question, I mean you have a product that does some of these features, in fact a lot of these features as I understand it. Is the response to acquire this business to accelerate the rate at which you can extend that technology and integrate it to your product lines as opposed to something specific about the feature set that Strangeloop had. How do I view the distinction between doing this internally and the acquisition? What is the variance there that cause you to add these 20 engineers?

Roy Zisapel

Yeah, so we believe, as we’ve started to go deeper into the FastView market and web performance optimization, we’ve seen what we believe to be very strong customer indication for the necessity of this technology. And therefore, we feel that create that acquiring IP in a very advance product that millions of dollars were invested in, over six years can advance us in this market and really create a very unique leadership position. So obviously there is some overlap today between the integrated module that we have in this offering, but as I said very quickly, we will have the FastView technology based on this acquisition across all our product lines.

Alex Henderson – Needham & Co. LLC

One more question. Can you talk a little bit about how the virtualization piece on this works. So, is this running on a virtual machine that is sitting on the hypervisor and therefore is separated from the hardware and how does that, I’m little confused about how that runs as a software module on your existing ADC. That’s a little confusing to me technology wise?

Roy Zisapel

Okay. So the current form factors they have is a physical appliance. The virtual appliance runs on top of VMware, and they have also a cloud service as I mentioned. So the virtual appliance is a regular VMware type virtualization solution that runs as a proxy, and when we are going to integrate it into our ADC, of course we’re going to make it part of VADI and integrate it in the specific way that we are running multiple instances in our platform. So we will continue to have a dedicated appliance, a virtual appliance very similar to what we have in Alteon and then down the road an integrated mode, where it’s part of our VADI offering or VX offering.

Alex Henderson – Needham & Co. LLC

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Alex Oakes with Barclays. Your line is open.

Unidentified Analyst

Hi. It’s Joseph here. I’ve a question. According to some source I found, about $22 million is invested into this company over the last six years. Where was the company in terms of its next stage of development around [strong and active] and helped you guys come in here? Are you keeping all the people in their current location of integrating in its other places? And then, it looks like there was an announcement with compatibility with Amazon and I’m wondering if that relationship has started to bear fruit for the company [away]?

Roy Zisapel

Okay. So, thanks, Joseph. And definitely, you know, a lot of money was invested as you’ve noted in the company, mainly in R&D. The sales operation of the company was relatively limited. I think they had around three sales teams covering all of the market. So I think the technology and our assessment and the customers that they have and we spoke to, the technology is very impressive. The performance gains are very significant, but from a sales point of view it’s in very, very early stage.

So I think this is why also this combination makes a lot of sense and we are able to leverage the strong technology and product base created over our infrastructure. We believe it’s directly in the center of the next-generation application delivery and capabilities that you need to support the cloud application going or deliver to mobile users globally.

In terms of the Amazon relationship, we already have a developing relationship with Amazon. The cloud offering that I’ve mentioned is running on an Amazon cloud. And we look forward to see how we can leverage this relationship for more business in the future.

Unidentified Analyst

Are customers already using that through Amazon cloud?

Roy Zisapel

Yes. There are several customers in production on the Amazon cloud.

Unidentified Analyst

Well, I guess location of the employees and then, if you look at the earn-out. Can you give us a little bit more detail about the success based and what kind of timeframe we are talking about there?

Roy Zisapel

In terms of employee location, the R&D center is in Vancouver, Canada and it’s going to be now the Radware Canada development center joining our centers in Delaware, Bangalore and Cary, North Carolina. We are rating, basically all the R&D and technical services personnel, and the rest of the team is integrated to the different hardware functions, marketing, financing, sales and so on. And in terms of the earn-out, the earn-out is based on achieving revenue milestones for the total of 2013.

Unidentified Analyst

Okay, great. Thank you.

Operator

Thank you. (Operator Instructions) We’ll go to line of Rohit Chopra with Wedbush. Your line is open.

Rohit Chopra – Wedbush Securities, Inc.

Yes. Thanks very much. Meir, just want to get a sense here again on the revenue, it looks like some sources are indicating this company it was generating $4 million to $5 million in revenue. Can you please give us the margin profile, may be on the gross margin line of this company?

Meir Moshe

The gross margin is very similar to our gross margin. Some cases have been a little bit higher than that depends on the mix of the product that we sell. So, in this case on the level of the sales, I believe that you have a true optimistic number for that as you can understand also from our guidance that and refer only for Q1, we are talking about really marginal number and it’s just like couple $100,000 for the first quarter.

Rohit Chopra – Wedbush Securities, Inc.

Okay. And then, what I wanted to get is a sense on was the subscription piece. Is that the primary revenue or is that just a good small and growing piece at this company or can you just give us a sense of that breakdown or how it looks right now?

Meir Moshe

The subscription is currently a small piece.

Rohit Chopra – Wedbush Securities, Inc.

Okay.

Roy Zisapel

We think the opportunity in the cloud services et cetera is not to sell it by ourself, but actually through partners and maybe through that grow the subscription fees. The major revenue stream is today from the, and the major customers deploying themselves through the appliances and virtual appliances.

Rohit Chopra – Wedbush Securities, Inc.

Okay. Thanks, Roy. And then, I just wanted to double-check something. On the close date, is this, do you have a sense of when that’s going to close?

Roy Zisapel

It’s closed.

Rohit Chopra – Wedbush Securities, Inc.

That’s closed, okay, okay. And then, lastly on geography, are they primarily North and South America or give us a sense on Geos. I know the revenues are small, but I just want to see how this, where the potential opportunities are?

Roy Zisapel

The revenues are small and it’s, I would say 90% coming from U.S. partners or U.S. customers. Some of the sales in the cloud or the cloud type partners can be global, to global customers, but they are in U.S. companies.

Rohit Chopra – Wedbush Securities, Inc.

Thanks very much Roy and Meir.

Operator

Thank you. We have a follow-up from the line of Alex Henderson with Needham. Your line is open.

Alex Henderson – Needham & Co. LLC

Hey, Roy, I was wondering if you could just remind us on the FastView, what the timeline that was when you launched that, what the response was, what the revenue baseline looks like, just some of the history around the FastView to round up the discussion.

Roy Zisapel

So we announced FastView as one of them of the new modules that the new version of Alteon, Alteon version 29 is having. It started to ship in a limited fashion in Q4, in a limited availability to select customers and was GA in February 22. We see FastView as an important module or the FastView technology and now the complete FastView product line. It’s a very important technology again in application delivery, especially as the applications are going to cloud and SaaS type of model and the customers are going to mobile workforce.

In that case, the additional one optimization technologies are not that suitable to deliver applications. You don’t have them in the cloud and it’s hard to put them on all the clients and client devices. There is a need for next-gen application delivery and optimization technologies whether those are appliances or a cloud services to deliver that. So, the early feedback we got with customers is that it’s very interesting. There is a lot of requirement both in large enterprises and in online retailers, and we thought given the trends we’re seeing in the market and the early customer feedback that we got that that’s a very important place to create leadership and to enhance our focus on application delivery.

Alex Henderson – Needham & Co. LLC

You had also said earlier that there was no competitive product from the other ABC companies and I recall the guys over it [at five] were showing a web page optimization stuff at their Analyst Day, in fact, figures to your web page as the page that they optimized and sped up. Isn’t that competitive with this product?

Roy Zisapel

Okay. So in the ABC space for years, in application delivery we are doing performance optimization, but the way that ABCs are traditionally doing performance optimization is up to what is called Layer 7 meaning we’re doing cashing, we’re doing compression, we’re doing SSL offloading, we’re doing TCP optimization and we’re doing some image manipulation. Those are the regular technologies of an application delivery controller.

What we are doing with FastView and with the Strangeloop technology is that the focus is not on the network. It’s completely complementary to any performance improvement you’ll do in the network. What this technology does, it’s optimizes the actually code of the website or of web application. So…

Meir Moshe

[That’s right.]

Roy Zisapel

So as our browsers are downloading the HTML code, which basically means the instruction set that tells the browser what to do, there’s many ways to write this code, very similar to security. You can write an unsecured code, a vulnerable code and a secured code, same goals for performance. You can write and optimize code for performance and you can write a generic code. What the FastView does, it optimizes this code and with that we are gaining tremendous improvements in performance, way more than any network type of optimization technology can do, meaning if you changed the logic correctly, obviously the gains are amazing and we think that’s the next frontier in application delivery performance optimization. Personnel result, we said, we don’t see anything out there that is similar. I think it will raise the bar, I believe other companies would invest, but we intend to keep and enhance this leadership position.

Alex Henderson – Needham & Co. LLC

Much clear. Thank you.

Operator

Thank you. We have a follow-up from the line of Michael Saloio with Oppenheimer. Your line is open.

Michael Saloio – Oppenheimer Securities

Hi. Just lastly, I thought I’d ask on the – I saw in the release that there is some opportunity within financial services providers. Could you give us an example of, I guess, if there is a financial services provider customer now, and then, how you’re kind of looking at that opportunity?

Roy Zisapel

So financial services are a good opportunity for this, especially as they move their applications to web based applications. In addition, if you think only on e-banking, the e-banking application is a great fit. You have customers all over the world accessing your bank application. They are accessing it today not only through desktops, but also through mobile phones, tablets, et cetera. So you need a global application delivery. You need to deliver it to multiple form factors, multiple browsers all over the world.

Traditionally, you might have used some kind of one optimization technology to branch offices and others, but that cannot be installed on your global user base coming from this huge amount of end devices. So we are seeing this technology that allows us from the data center to accelerate the application delivery to every customer, everywhere regardless of the end user device and browser technology is a great feat.

On top of that is banks, financial services are embracing the mobile workforce. We’re seeing more and more employees that need fast access or real-time information is very important to the applications. Again, outside of the office and we believe FastView would be a great feat for that. We’ve mentioned one financial service customers, but we believe we will be able to replicate it to more.

Michael Saloio – Oppenheimer Securities

Okay. And that actually brings up another question. As you look kind of within one of these organizations, is this something that you would deploy alongside WAN optimization. In other words, if a customer is already using WAN optimization, this is obviously a different technology that wouldn’t prohibit them from deploying something like this?

Roy Zisapel

Definitely no. This is a technology that’s basically is data centered to a global user community, not to the people that are working in a branch office. Of course, you know the people at the branch can enjoy the same benefits as anyone else, whether it’s a customer, partner, or the mobile workforce, but this technology is data centered to a wide audience and we feel that as applications are moving more and more to web applications you can really use the browser. And the computer of the end-user or the smartphone of the end-user as is the other side of your acceleration technology and you don’t require another appliance. In addition, as applications are going to the cloud and it’s going to be an – the end-user devices are growing in number, it’s going to be very hard to install software on both ends of the connection, which again I think makes the FastView concept a very attractive one for all online retailers, enterprisers, et cetera.

Michael Saloio – Oppenheimer Securities

Okay. Thanks.

Operator

Thank you. And at this time, I’m showing no further questions in queue. Please continue.

Meir Moshe

Okay. I would like to thank everyone for joining our call today and we look forward to meeting you again. Thank you.

Operator

Thank you. And ladies and gentlemen that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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