Check Point Software Technologies Ltd (CHKP) 2011 Q2 法說會逐字稿

Greetings and welcome to the Check Point Software Technologies Ltd.

second-quarter earnings conference call.

At this time, all participants are in a listen-only mode.

A question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kip E.

Meintzer, Head of Global Investor Relations for Check Point Software Technologies.

Thank you, Mr.

Meintzer, you may begin.

Thank you, Claudia.

I would like to thank all of you for joining us on this beautiful summer day to discuss Check Point's record financial results for the second quarter of 2011.

Joining me on the call today are Gil Shwed, Founder, Chairman and CEO, along with our Chief Financial Officer, Tal Payne.

As a reminder, this call is being webcast live on our website and is being recorded for replay.

To access the live webcast and replay information, please visit the Company's website at CheckPoint.com.

For your convenience, the conference call replay will be available through July 25.

If you would like to reach us after the call, please contact Investor Relations by e-mailing Kip at CheckPoint.com or by telephone at +1-650-628-2040.

Before we begin with management's presentation, I would like to highlight the following items.

During the course of this call, Check Point representatives will make certain forward-looking statements.

These forward-looking statements may include our expectations regarding demand for our security products, our expectations regarding the introduction of new products and programs and the success of those products and programs, and our expectations regarding our business and financial outlook for the third quarter of 2011 and full year.

Other statements which may be made in response to questions, which refer to our beliefs, plans, expectations or intentions are also forward-looking statements for the purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act.

Because these statements pertain to future events, they are subject to various risks and uncertainties and actual results could differ materially from Check Point expectations and beliefs.

Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in Check Point's latest annual report on Form 20-F.

As a reminder, Check Point assumes no obligation to update its forward-looking statements.

In our press release, which has been posted on our website, we present GAAP and non-GAAP results along with reconciliation tables, which highlight this data, as well as the reasons for our presentation of non-GAAP information.

Now I would like to turn the call over to Check Point's Chief Financial Officer, Tal Payne, for a review of the financial results.

Thank you, Kip.

Good morning, good afternoon to everyone joining us today.

I am very pleased to begin the review of such an excellent quarter and a first half of the year.

For the second quarter, we once again achieved record quarterly results, exceeding the high end of our projections.

We demonstrated solid revenue growth of 15% over the same period in 2010 while our non-GAAP EPS was $0.68, reflecting 17% growth year-over-year.

Before I proceed further into the numbers, let me remind you that our second-quarter GAAP financial results include non-cash equity-based compensation charges, amortization of acquired intangible assets, gains on the sale of marketable securities previously impaired and the related tax effects.

Keep in mind the non-GAAP information is presented excluding these items.

Now let's take a look at the financial highlights for the quarter.

In the second quarter, revenues exceeded the high end of our projections.

Revenue reached $300.6 million, representing an increase of 15% compared to $261 million in the second quarter of 2010.

This growth was driven by increased sales of enterprise gateways and continued growth in our annuity software blades.

Product and license revenues were $119.3 million, representing a 15% increase over the same period last year.

The growth in product sales came in from the high-end appliances driven by Power-1 series.

Our software updates, maintenance and subscription revenues reached an all-time high of $181.4 million this quarter, a 15% increase year-over-year.

The growth was driven by our annuity software blades, especially the IPS and application control that was launched at the beginning of the year.

Deferred revenues as of June 30, 2011 were $457 million, an increase of $42 million or 10% over June 30, 2010.

We had double-digit growth in revenues across all geographic regions with Americas and Asia-Pacific leading the growth.

Revenue distribution by geography for the quarter was as follows.

Americas contributed 45% of revenues, Europe with 39% and Asia-Pacific and Japan, Middle East and Africa region contributed the remaining 16%.

From a deal size and quantity perspective, this quarter, we saw an increasing number of large deals.

Transactions greater than $50,000 accounted for 61% of total order value compared to 58% in the same period a year ago.

We had 37 customers that each had transactions with a value greater than $1 million compared to 25 transactions in the same period last year.

From an operating perspective, we posted great results.

Our non-GAAP operating income was $171 million in the second quarter of 2011, an increase of 18% compared to the same period last year.

Non-GAAP operating margin for the quarter was 57%, an increase of 2 points compared to the same period last year.

This was achieved primarily as a result of our top-line performance.

GAAP net income for the second quarter of 2011 was $128 million, or $0.60 per diluted share, up from $103 million or $0.48 per diluted share in the same period a year ago, representing a year-over-year increase of 25%.

Non-GAAP net income for the quarter was $146 million, or $0.68 per diluted share, up from $122.4 million, or $0.58 per diluted share in the same period a year ago.

Non-GAAP earnings per share exceeded the high end of our projections representing 17% growth year-over-year.

This was achieved even with the 2.4 million increase in number of shares used in the computation of earnings per share compared to the same period last year.

We had a strong cash flow from operations this quarter with $175.5 million, an increase of 18% from $148.9 million in the second quarter a year ago.

Our DSO, days outstanding, was 60 days this quarter compared to 65 days last quarter.

During the quarter, we purchased approximately 1.38 million shares for a total cost of $75 million.

Finally, our cash balances reached $2.690 billion at the end of the quarter.

Now let's turn the call over to Gil for his thoughts on the quarter.

Thank you, Tal and thank you, everyone, for joining us on the call today.

Second quarter completed another very good first half for us.

You've heard the numbers from Tal, so I am not going to repeat them, but beyond the financial numbers, there are both qualitative and quantitative supporting values.

The acceptance of our 3D Security vision that we launched earlier in the year is very positive by our customers.

The Software Blade architecture launched about two years ago is now bearing its fruits.

Not only is it being used by many customers, but in the past quarter, it had significant contribution to our financial results.

The sales of annuity software blades, like IPS, is higher than anticipated and are now a major driver for both revenues and deferred revenue.

In general, our business in the second quarter worked very well in almost all dimensions.

We sold more enterprise gateways at higher ASP.

Software blades like our IPS and application control have shown very high growth with significant contribution.

Other software families also showed nice growth and even our new DLP software blades, still small, but showed a big jump in the second quarter.

In May, we held our major customer and partner conferences, CPX in Chicago and Barcelona.

In both conferences, we had good attendance compared to previous years.

In our event survey, we scored the highest level of satisfaction for the content of the event and the alignment of Check Point's strategy with the needs of our customers.

So just as I said, our indicators so far are quite positive.

In the world around us, we have seen a big surge in targeted attacks into organizations of all types.

While everyone is concerned about the rising level of targeted attacks, this is a natural and unwanted evolution of cyberspace.

The attacks are contributing to increased awareness to the importance of security and especially the importance of adopting our 3D Security vision, combining corporate policy, involvement of the people and enforcement through the right technologies.

As I look into the second half of the year, we expect results to be even better than our earlier projections.

Before I share our projection for the fourth quarter and full year, I would like to stress one point.

We are in the process of launching some new products.

While these new products should have a positive impact in the short and long term, they always pose a slight risk to the immediate months, especially given the summer holiday season that we are facing in the fourth quarter.

So with that in mind, I would like to reiterate my positive outlook for the second half of the year and provide our financial projection.

For the first quarter, we expect revenues in the range of $300 million to $308 million and non-GAAP EPS in the range of $0.67 to $0.70 per share.

GAAP EPS is expected to be approximately $0.08 less.

For the full year, we increased our projection and expect revenues in the range of $1.225 billion to $1.250 billion and non-GAAP EPS in the range of $2.77 to $2.84 per share.

GAAP EPS for the full year is expected to be approximately $0.32 less.

Once again, I would like to thank you for being with us on the call today.

We had a great first half of the year and we look forward to the remainder of 2011.

With that, we can open the call for your questions.

(Operator Instructions).

Brad Zelnick, Macquarie.

Thank you very much.

Congratulations on a great quarter- and happy anniversary, as I think it is the 15th year as a public company, Gil.

The metrics are quite impressive if we go specifically to large deals, 37 customers with transactions greater than $1 million versus 25 a year ago.

Can you just talk about what you're seeing as you go in with the 3D Security message?

What is really driving these large deals and is this really sustainable?

First, thank you very much.

I think that what we are seeing is a continued growing pipeline that companies are building, upgrading, migrating their security infrastructure.

And I think the more time evolves, companies have bigger infrastructures, so their upgrades, their changes and so on are becoming bigger and bigger and that is the main driver for the large deals.

I don't know if it is sustainable for every quarter or if that should be a measure which would repeat itself every quarter.

We had a very good concentration of deals this quarter, but the overall direction of the business is something that we stand behind and we are -- as I said, I think that we had very good signs in the first half and all our indicators are indicating even a better second half.

Gil, just to follow up, your guidance for the full year is above our expectations, but just to get specifically an understanding around what you said about the new product releases and the near-term risk that that can create, can you just explain that a little bit further for us?

I don't want to dive into the details because I don't want to prelaunch any product, but during the fourth quarter, we expect some new products to come out.

All these products should have very positive impacts on our results, again, both in the short and long term.

But like with every new product, sometimes when there is a new product, the customer stops or halts their purchasing and wants to evaluate the new product and that can happen and that combining with other things like holidays, like logistical issues and things like that may have a slight risk to every quarter.

Now, as I said, I don't anticipate these risks to materialize.

I am very, very positive about the quarter and the rest of the year, but I want to share that information with investors (inaudible) our quarterly opportunity to discuss that, so I want all of us to be aware of it.

Thanks, Gil.

Just one quick last one for Tal.

Tal, last quarter, you mentioned that you expected for the full year cash flow growth to be in line with net income growth.

You have shown nice acceleration here into Q2.

Do you still maintain that expectation for the full year?

Thank you again.

Sure, I see no reason why not.

Obviously, it can be a few percentage up or down.

It's the cash flow, it's not the P&L, but it should be in line with our P&L.

Thank you.

Phil Winslow, Credit Suisse.

Hi, guys, another great quarter.

Congrats.

Gil, just want to dig a little bit into R65 and also what you have just been seeing on the blades.

Last quarter, you gave us some metrics about what percentage of the base you have been able to move off of R65 and get them to upgrade.

I wonder if you can give us an update there.

And then also as you are seeing people buy blades for the first time, especially those moving off of R65, just sort of what is the uplift that you are seeing, what are the main blades that they are going for and what is the real driver behind that?

Okay, so first I think you meant R75, not R65.

R65 is like four or five years old.

R75 is the more recent version.

Overall, the acceptance is very positive.

We are now seeing that the installed base is moving very nicely into R75.

I think we are seeing close to 40% of the installed base is now migrating to the software blades architecture and that means that, on one hand, there is plenty of customers that can still upgrade and still migrate and provide more upside and on the other hand, there are very significant parts of our installed base that can also take advantage of the software blades architecture and implement that.

In general, we have seen good acceptance of all blades, like total security blades packages, which includes the e-mail security, URL filtering and others that have grown nicely.

The new application control that we started since the beginning of the year is showing nice contribution.

The biggest contributor so far is IPS and I think I mentioned it a few times.

It is now pretty significant.

All these blades have very nice quarter-over-quarter and year-over-year growth.

Remember that most of our blades today are being sold as annuity.

So what we saw this quarter, only a portion of that is recognized in the revenue.

The rest goes to the deferred revenues.

So overall -- and I think I mentioned that I am very, very pleased with what we are seeing with software blades right now.

Gregg Moskowitz, Cowen & Co.

Okay, thank you.

Gil, you alluded to the wave of recent high profile security breaches and how that is contributing to awareness.

Has that also translated into an increase in activity thus far or not quite yet?

So far -- activity, yes, and the awareness and so on.

So far, I can't say that we have got deals that are a direct result of (inaudible) service.

Suddenly we have seen a big surge in opportunities.

Most of the deals we're working on take a long time and are planned and so on.

I can say that what we are seeing very consistently is the level of awareness of security in general and to Check Point in particular is going up in the organization.

A few years ago, we were talking to the firewall administrator, moved up to the chief information security officer, now more and more CIOs and in some cases even CEOs want to hear about the security solutions.

The message of 3D Security is very much in line with that because we are not just coming and speak about technicalities, but about the need for a company to adopt an overall strategy and combining a corporate policy, not a technical policy, but a corporate policy, involvement of the people and enforcement technology.

So I think we have seen that with many, many customers, but the message of security has gone up and I think with the years that should be translated also to an increased deal size and increased activity.

Some of it we already see, but I don't think that is a result of last month.

Okay, perfect.

Thanks, Gil.

And then for Tal, short-term deferred revenues went down sequentially by a little more than what we typically see in a Q2, but on the flip side, long-term deferreds actually went up more than usual.

Just wondering if there was anything that contributed to that.

Not really.

No, deferred revenue can fluctuate between quarters.

You can see typically in Q -- I can't say typically because every quarter it changes, but typically we have the significant increase in Q4 and then we see a reduction in Q1 and in Q2.

Actually, in this quarter, reduction versus Q2 was smaller than typical because we had very strong deferred revenues, but bear in mind that a portion of the booking is not going into the deferred revenues because the invoice was not issued, so it is not really a one-on-one correlation to revenue and to bookings.

Okay, and then just a quick housekeeping, Tal.

What were security appliances roughly as a percentage of product revenues?

Approximately 80%

Great, thank you.

Brent Thill, UBS.

Thanks.

Gil, just on IPS, can you just give us a sense of what is happening in the market from your perspective?

And you noted the strength in the segment.

Is this competitive displacements, are you just more comfortable about your internal execution?

Just help us frame what you are seeing in IPS.

Thank you.

First, I think our model compared to the IPS companies is slightly different.

Most of the IPS solutions are being sold today as standalone solutions, large, expensive solutions.

Our message here is that you can embed the IPS and get higher quality, much lower costs, much better operational efficiency by integrating more blades into the existing gateway.

So I don't know if we necessarily displace big installation of pure play IPS vendors, but we definitely bring the message of IPS can be a reality to many more customers.

I think in some cases customers also choose to embed the IPS in our solution instead of renewing an old IPS product and that I think also happens.

But overall, I think what we are showing the market here and the evidence we get from our customers because we have very, very high renewal rates the sometimes bundled IPSes that we provide on some of our products is that customers are getting that message and feel much more comfortable to enable IPS and to get the added threat protection than they did before.

Shaul Eyal, Oppenheimer.

Thank you, operator.

Good afternoon, guys.

Good quarter, congrats to Amnon as well if he is around.

Gil, two quick questions.

The introduction of upcoming products, are these blades related to appliances, what should we be expecting?

I would keep the surprise for the upcoming announcement.

All right.

That's fair enough.

Gil, as the cash and that's kind of the typical one, the cash continues to grow and you guys religiously buy the kind of one quarter of the repurchase plan every quarter, what prevents you from lifting the repurchase plan in the near term now given that the Israeli tax law is also in effect?

I will let Tal answer that.

I think the tax effect should be a year or two down the line.

It is not effective yet, but I think we just last quarter decided to increase the buyback program by 50% I think, but that is a good message that we have done and a good thing that we have done and I think we would like to live with that policy for a few quarters before reevaluating that and deciding or checking the parameters if we can or should increase that.

Maybe I will just add one more word.

As you said, we would like to increase it.

There is some tax effect on the additional amount.

We see no reason to have this tax effect at this point in time.

In two years, in 2013, there will be no longer a tax effect, so everything is open and we will reconsider each year as we do anyway.

Okay, thank you for that clarification.

Good luck, thanks.

Walter Pritchard, Citi.

Hi, thanks.

Two questions.

First, on Europe.

It looked like you had a pretty good performance there, up about 10% year-over-year.

I am wondering if you could talk about what you saw across that geography and if the performance was fairly even or if things are starting to get a little bit more volatile in that region.

In Europe, the performance varies by country and it is varies every quarter.

Now in terms of real parameters, I don't have anything major in Europe.

I know that I got from people a question about some of the troubled economies in Europe and these countries.

So I will tell you that these countries represent about 10% of our sales in Europe on the same time they had the biggest growth this quarter.

We have actually seen very, very nice growth in countries that their economy is considered in trouble and I am talking 50% growth and things like that, not 12% instead of 10%.

But really it varies.

When I look at the country-by-country picture, it is very different.

One maybe region that has consistently been very good in the last few quarters is Eastern Europe and in Eastern Europe, especially Russia, we saw a great evolution.

I think we have implemented about a year and a half ago a strategic plan for a few countries around the world how we will increase our investment and at least for Russia, we see that the result is bearing its fruit and it is showing positive results there.

In the total geography, Europe did well with double-digit growth.

And then, Gil, just on Endpoint, didn't hear you talk much about it, haven't seen as much out of Check Point over the last few quarters around this market.

I am just wondering how much of a focus is that market still from an organic development perspective, as well as potentially looking outside the Company for M&A opportunities in Endpoint.

Okay, that's a very good question.

So about the end of 2010, we came out with a very big and major version for the Endpoint and I think that is something to look forward to see its results and there is more things we should do around that.

The results in Endpoint are still not where I wanted them to be, but this quarter is actually a very big surge compared to Q1.

So we have actually seen a very good wake-up in number of deals and really, really large percentage compared to Q1, but it is still not enough, so I am not still highlighting it like we are over and we are happy about everything.

About potential for acquisition, yes, there is a potential for acquisition there and I think we are looking at ways to differentiate our Endpoint solution with more unique technologies around that and there is actually a nice number of technologies that can help us invest in the world around us.

So that's definitely a possibility.

Daniel Ives, FBR Capital Markets.

Thanks.

Could you talk to any competitive changes that you are seeing in the market?

I mean obviously the deal sizes are getting bigger.

It seems like there is more and more share gains.

Anything that stood out this quarter?

My feeling and again, we don't have a lot of supporting data, but our feeling is pretty positive about our competitive position, especially given that the two large competitors in our marketplace, Cisco and Juniper, they don't publish separate numbers for security.

But our feeling that we are actually having a very good success rate in the market against them and that we are increasing share.

So that is the major part of that.

I mean there is a lot of activity, there is a lot of companies in the marketplace, but overall we think that we are increasing shares, especially against Cisco and Juniper.

Okay, and would you expect ASPs to continue to see a lift as blade strategy continues to gain steam?

I hope so, but I think we have reached a pretty nice -- we had a very nice run-up in the last two quarters and actually even more so in the last two years.

So I am right now not necessarily pushing into increase the ASP, but more balancing the installed base.

Actually, in some cases, even more focused about midrange.

We have had a lot of success with both high-end customers and high-end appliances.

So there is a lot and we are going to be pushing that very strongly because I think we want to -- that is a great market segment, but at the same time, I am actually pushing our salesforce in some cases to focus more on the smaller deals and midsize products because they also have a lot of potential.

Just as it relates to the ASPs, these can lower ASP because of the change in the mix not because of the individual products.

Thanks.

Robert Breza, RBC Capital Markets.

Hi, thanks for taking my questions.

Can you talk about any concentration that you see by vertical?

You talked about some of the higher ASPs.

I am just curious as you look at -- was there any vertical strength at all that you saw?

Nothing major.

I think financials continue to be a big segment, and we have seen some nice uptick in the telcos and the recent quarter's government is slightly up, but also industrials are up.

But all these changes are quite small.

It is percentage movement of one point in every segment, so nothing major.

And if I look at the segments that went down, I also don't see anything that went down significantly.

Everything is sort of in line.

Maybe as just a quick follow-up, I know you talk a lot about the blade architecture, but in your prepared remarks you talked about gateways seeing some renewed strength.

Are you seeing companies implement somewhat a different gateway strategy now that is kind of showing some strength, or can you just talk to us in what is driving that gateway strength?

Thanks.

Nothing major.

I think we are seeing, I mean [bizarre] things like virtualization that drive -- on the one hand drive more purchases and bigger purchases, on the other hand, but theoretically can drive down the number of Gateways.

Overall, I think we are just seeing slightly better market, more demand.

And that drives up gateways, especially on the enterprise and high-end.

I think (technical difficulty) work on opportunity on the low end, and that will be in the future too.

Thanks, nice quarter.

Philip Rueppel, Wells Fargo.

Great, thanks very much.

Given this is about the third quarter of increasing strength at the high end, Gil, you mentioned you might want to focus more on the midrange.

Has there been any issues there or has it just been the fact that the high end has been just significantly better?

No, the midrange is also doing fine and particularly this quarter, we had both the UTM-1 appliances that are the midrange appliances.

We had the particular strength compared to Q1, a big jump in that.

But mainly we have done our strategic analysis last year and we figured out that we are seeing great returns when we invest in large accounts.

Talking about for example the Forbes 2000 list of accounts and starting this year, we have made shift of resources on focusing on these accounts and at least so far it shows that it is the right investment.

These accounts are looking for the strength of what we have, the sophistication and so on.

Their projects are large, so this is a very good segment to invest in.

Great.

And then on the blades, you mentioned the strength in IPS continuing and slightly also DLP and application control.

How about the mobile blade?

Are you seeing any pickup there in terms of activity and/or sales?

Yes, absolutely.

We have also seen a very nice increase in that.

Again, it is not any major numbers, so that is why it wasn't on my list, but just before the call, we've checked the number and the growth is quite nice with -- started with a new blade six months ago, started from zero, it reached -- starting to reach nice levels and a very high percentage of growth every quarter so far.

Great, thanks very much.

Keith Weiss, Morgan Stanley.

Excellent.

Thank you for taking my question, guys.

Good quarter.

I was wondering now -- I mean it looks like the environment continues to remain pretty robust for you guys and if anything perhaps even accelerating.

You have shown good results over the past -- solid double-digit results for a while now.

Any thought to increasing investment in distribution or sort of changing the way you think about the investment in sales and marketing given the environment has really held up well for you guys?

I think we have continued to invest.

The biggest bottleneck is actually finding enough good people.

It is not -- it is not necessarily whether we want to or not or don't want to.

As I mentioned, one of our strategic plans for this year was an investment in major accounts and shifting more resources into this kind of an account.

We did a very thorough of the entire world and found out which countries we should invest much more, which countries we should do a little bit of alignment and so far, even though large accounts take a long time to materialize, we have seen pretty nice results in just two quarters.

So that is the current big focus around that.

I think we have also started this year a different focus with a focus on SMB.

At the end of 2010, we hired a new VP for a small and medium business.

Actually the first time that we had somebody just focusing on that segment.

He is in the process of building a small but dedicated salesforce to work with distributors for SMB.

So I mean we are not -- I think that we are not neglecting most segments.

Still I think the biggest strength is coming from the enterprise and the higher-end markets today.

Excellent.

And if I could sneak in one more.

In terms of the large deals that you are seeing, are you seeing any increased attached between multiple product segments.

You also mentioned some -- a little bit of strength in Endpoint.

Are people starting to attach Endpoint with gateway-type deals and are you seeing any increase in deal sizes from that kind of dynamic?

Gateway and Endpoint we haven't seen enough.

While we have a nice number of very loyal customers that use the entire Check Point portfolio, including Endpoint and Gateway, but I won't say that the typical customer that wants to renew or to buy these two products together.

We are definitely seeing the message of consolidation on the Gateway and buying multiple software blades is a very good strength and I think we have looked at all our software blades whether it is, as I mentioned, URL filtering or antivirus or antispam and definitely IPS and application control that more customers are buying, more customers are using them and that's, as I said, a good testimony to the strength of the strategy of consolidating multiple functionalities in the software blades architecture that implements that.

Excellent.

Thank you, guys.

Sterling Auty, JPMorgan.

Yes, thanks.

Hi, guys.

Actually I have two questions.

First one is more from a macro view.

There has been lots of questions about the macro environment in several geographies through the quarter.

Can you give us any type of color or commentary about the tone of business as you move through the quarter?

Meaning was it consistent through the whole quarter or did you see any specific ups and downs?

I think it was pretty consistent and it was continue to be back-end loaded like all our quarters, but I think the indicators were the same indicators throughout the quarter.

The run rate was the run rate.

Still we have back-end loaded quarters and much of the reward and sometimes the risk comes in the last few days.

Okay.

And then a follow-up question is on deferred revenue.

As we look at the success of the annuity blades that you mentioned, I would imagine that is contributing to the deferred revenue.

How should we start to think about the seasonal patterns that you mentioned earlier?

Should they begin to change or still the annuity blades just too small to offset the traditional kind of deferred revenue and maintenance trends that we normally see?

I think you should expect the same trend to continue.

The software blade number becoming a nice and significant number, but still out of the $457 million, it is a small number.

(multiple speakers)

I think it is -- soon it won't be that small, but I think we will see the renewal pattern very similar because a large account might still want to renew their account in Q4 and in Q1 and the model that we are pushing for customers is to renew the entire account, including the software blades at once.

That is the ease for the customer, that they don't have a different Check Point renewal every quarter and every month, but sort of consolidating this entire renewal.

And that is the part that is concentrated into Q4 and Q1.

Sure.

I just don't want you to expect now that because software blade is kicking in to start to see an increase in deferred in Q2 and 3.

So if that is what you meant, then the answer is no, you probably will continue to see a reduction in Q2 and Q3 and a big increase in Q4.

All right, thank you, guys.

Stephen Patel, Gleacher & Co.

Hi, thanks for taking my questions.

I wanted to follow up on the blades.

Can you give us an update on renewal rates and the mix of IPS versus non-IPS blades?

I think last year you had also mentioned having around $100 million in blade bookings.

Do you think it is a reasonable target to surpass $150 million this year or exit the year close to a $200 million run rate?

I think we should -- I mean I think we should probably get to a run rate of $150 million this year.

That is my expectation.

I don't know if it will occur in Q4 or maybe in late Q3 even, but I think we are getting closer to that.

IPS are a dominant portion, but again when we analyzed that, it wasn't just IPS.

I think the other one, URL filtering, antispam, antivirus, and again application control and so on have all had a good increase and they also had a nice share.

I think the renewal rates are similar to the type of blades.

It is not the renewal rate that we see typically in the regular software update for the firewall naturally.

But if you remember when we discussed it in the previous call, I said that our internal expectation was it will be higher than 10%, around 10%, maybe 15% and we were very pleasantly surprised that it's significantly higher, slightly less than 50%, but significantly higher, which was a very nice surprise.

Okay, thanks.

And can you talk a little bit more about OpEx?

It looks like it decelerated your growth and OpEx decelerated a little bit this quarter and R&D was down.

Do you think we will see a further deceleration after the launch of your new products or will you need to be spending a significantly higher amount in sales and marketing to launch the new products in the second half of the year?

I would say that most -- looking even in the number just qualitatively, most of our expected expenses are headcount-driven.

And we are definitely not going to hire less people right now; we are going to hire more.

I think in the first quarter we are actually going to hire a lot of people.

We have several entry-level programs for people in all domains of the Company.

So like in a few weeks, we are going to have about 100 people starting at Check Point, entry-level people and growing both in sales, in technical services, in QA and in R&D.

All these areas we have entry-level programs right now that are starting now or in August.

So that is going to be a push for the investment.

It is not huge amounts because, as I said, it is entry-level people.

In Q2, we had the big conferences that are seasonal and those repeat every quarter, but on the same time in Q3, we are planning a number of regional conferences in Australia and in Asia in general.

And these, by the way, two regions that have also grown very, very nicely this quarter.

I think the entire Asia region has the all-time record quarter, even better than Q4.

Thanks and congrats on the quarter.

Jonathan Ho, William Blair.

Great quarter, guys.

Just a quick question in terms of the application and control blade.

Can you give us some additional color on maybe how that message is resonating with your customer base and whether it is having much of an impact in terms of Gateway refreshes?

I don't know if it is happening -- necessarily refreshing Gateway.

For that, they can get the application control blade on every Gateway, on all the Gateways as well.

I think the message of these technologies is a very positive message.

Customers have been using our product for many years.

With application control, suddenly they can see and enforce things that they couldn't see before.

So that is very nice, that you use something for many years and suddenly something new opens to you and you don't see everything, web traffic, but you can see much bigger, much higher level of granularity and much better level of understanding of what people are doing and in turn, in security, being able to control more threats and to eliminate Web-based threats that are a big part of the risks that we are facing every day.

It is bundled today with new appliances, so a portion of the appliance revenue is allocated to this blade, but we have actually seen some nice a la carte customers of existing Gateways that have bought the supplies, that have bought these blades.

So I mean the acceptance is very, very positive and customers overall like it a lot.

Michael Turits, Raymond James.

Hey, guys, good morning, good afternoon.

Gil, you mentioned that you would look at acquisitions in Endpoint.

Should we think of those as smaller technology tuck-ins or would you do something larger where you could actually buy some marketshare customer base?

I think on large acquisitions, I can't comment and I think there is no reason to build any anticipation because these deals are one-off and they tend to be planned or anticipated.

Smaller technology deals I think we have a few on the horizon and I think there is a good chance that we will see something happening.

And just one other question, as people add more blades on, how much of an impact is that having on the size of the boxes that people buy?

In other words, is it like buy more software, is that also having a positive effect in driving up the amount of bandwidth that people need and driving up people to higher-end boxes?

Generally speaking, yes.

I think part of the job that we have as a vendor is also supply stronger appliances.

And I think one of the reasons to upgrade them and to buy them is to -- is the fact that you want to get more out of each box.

Keep in mind that a 10-year-old or a 6-year-old box still works and is still doing the same good job as it did six years ago.

There are two reasons to upgrade.

One because you are going to need more bandwidth and more power and the second one is because you want to implement new blades and new threat protections that didn't exist five and six years ago and for that, you need a higher capacity appliance or something to run the software on.

And I think both of these things are driving the renewal and refresh that customers are performing.

Great.

Thanks very much, guys.

Jonathan Ruykhaver, Morgan, Keegan.

Yes, hi.

Looking at product and license growth, you mentioned strength from high-end appliances and Power-1.

And I believe you mentioned in the past that some of that strength is a conversion of the Nokia customers from the IP series.

Is that conversion the majority of the driver to the Power-1 growth that you are seeing today?

No, not really.

When we acquired Nokia two years ago, we thought that Nokia would decline or the IP series would decline and move and that didn't happen.

Actually Nokia held up almost two years very strongly.

It's a good platform.

Its customers are very loyal and actually we sold much more IP series appliances after the acquisition than were sold before the acquisition.

I think the main demand for Power-1 is just that it is a good platform and I think that is what we are happy about.

I think we are seeing in the margins some shift from IP series to Power-1, but definitely not a majority of the demand.

So you say that the IP series product is stable at this point?

Yes.

Okay, just a follow-on question.

If you look at Gateways shipped in the quarter, can you provide any color on the mix and the growth between conversion activity within the installed base, growth that is driven by marketshare gains and maybe new market growth driven by applications, new applications for firewalls for example maybe around a new wireless network segment?

I don't think that I have a breakdown.

When we analyze deals and look to examples, we have seen all of the above.

We have seen competitive displacement of non-Check Point customers.

We have seen a refresh of Check Point customers.

We have just seen new customers that are building better infrastructure, new data centers and new infrastructure that didn't exist before.

So I think we have seen examples of all of that and we have seen very old Check Point customers that haven't touched their installed base for many years.

And now as we approach them and show them the new value in software blades, the new value a new product can provide, they were happy to upgrade and buy new products.

So I think we have seen all of that in the recent deal analysis that we have done.

Okay, good enough.

Thank you.

Claudia, it looks like we are out of questions there, huh?

Yes, sir.

Claudia, it looks like we're out of questions.

Is that right?

We do actually have a question coming from Alan Weinfeld with Kern, Suslow.

Congratulation, guys, great quarter.

I was really interested -- this was I think the best trend quarter-after-quarter-after-quarter we have seen in a number of years if you look back in the last decade.

And if you look at Fortinet, they have also, I think, a great trend going.

We will find out tomorrow night.

What would you say is happening overall in the environment besides the things we already know about the cyber hacking, because you do it with all, mostly software and different kind of appliance and they do it with kind of a hardware ASIC chip, totally different kind of appliance, even more in the network and the business.

Can you give any color there why you are so strong, they are so strong at the same time, but you do it totally differently?

Sure.

Thanks for the question.

First, I think they do a very good job as evidenced by their numbers and that is nice.

I think what we are seeing is that some of the other vendors like Cisco and Juniper may be losing share and us and Fortinet and maybe two others are gaining that share.

I think that some of the success of Fortinet is coming from the low-end Gateways selling on the value of buy fast and cheap equipment and some of our gain comes from buy sophisticated and deep threat analysis type of security.

I think like in every market, these are both valid strategies.

I think overall and long term, the superiority of our technology will continue to prevail because security is a very dynamic area and I think people have heard me say that, 10 years ago, 5 years ago and now security is something that changes very frequently.

ASICs are good to solve a problem that is very well known and that can be accelerated and over a short period of time, they can do a pretty good job, but long term they don't sustain.

And we have seen it with some people that came before Fortinet and now are declining and I think that as much as I think Fortinet is doing a good job, the success of the open platform, the software strategy that we are pushing will prevail and show that customers need that.

Especially with all the attacks that we are seeing now, you need to completely change the environment flexibility, deep blade analysis, multiple blades, things that we are now producing in a great way with our architecture.

All right, thank you.

Thank you.

It appears there are no further questions.

I will now turn the floor back over to Kip Meintzer for closing comments.

Thank you.

Thank you, everyone, for joining us on the call today.

We enjoyed all your questions and if you have any further, please reach out to us after the call.

And other than that, have a great summer and we will talk you guys in October.

Thanks.

Have a great day.

Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time and we thank you for your participation.