Check Point Software Technologies Ltd (CHKP) 2011 Q4 法說會逐字稿

Greetings and welcome to the Check Point Software 2011 fourth-quarter and full-year financial results conference call.

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

A brief 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, Mr.

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

Thank you Mr.

Meintzer, you may begin.

Thank you.

Good morning to all of you.

I would like to thank all of you for joining us today.

On the call with me 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, a conference call replay will be available through January 26.

If you would like to reach us after the call, please contact Investor Relations by e-mailing kip@CheckPoint.com or by phone at 650-628-2040.

Now 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; our expectations regarding our business and financial outlook for the first quarter and full year 2012.

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 section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934.

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

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

As a reminder, these forward-looking statements are based on information available to Check Point as of today and 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 it's my pleasure -- 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 and good afternoon to everyone joining us on the call today.

I am happy once again to begin the review of a great recorder and what turned out to be an excellent year for Check Point.

This quarter we posted all-time record results across our key metrics.

Our revenues for the fourth quarter increased by 12% and were towards the high end of our projections.

Non-GAAP EPS was $0.84, representing 15% growth year-over-year and $0.02 above the top end of our guidance.

Before I proceed further into the numbers, let me remind you that our fourth-quarter and full-year 2011 GAAP financial results include non-cash equity-based compensation charges, amortization of acquired intangible assets and other acquisition-related costs, and the related tax effects.

Keep in mind that non-GAAP information is presented excluding those items.

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

In the fourth quarter our revenues reached $356.8 million, representing an increase of 12% compared to $318.5 million in the fourth quarter of last year.

This growth was driven by all our business elements -- more products, a large increase in Software Blade, and growth in premium support services.

Product and license revenues were $158.2 million, representing an 11% increase over the same period last year.

Over the last few months we have launched our new appliance lines.

It was received with great enthusiasm in the market with the new data center product, the 61000 and the 21400 providing significant contribution.

Our software update, maintenance, and subscription revenues reached an all-time high of $198.5 million this quarter, a 13% increase year over year.

Subscription revenues were mainly driven by our new Software Blade that are becoming a significant part of both revenues and deferred revenues.

Overall deferred revenues as of December 31, 2011, were $552.2 million, an increase of $88 million or 19% over December 31, 2010.

Short term deferred revenues increased by 16%, higher than seasonally expected.

The increase in deferred revenues is attributed to strong booking of premium support in our annuity Software Blades.

As we mentioned in the past, since we launched the Software Blade Architecture our product offering includes many annuity blades bundled with majority of our network security gateways.

In terms of revenue allocation, we extract from our product revenues the fair value attributed to those blades (inaudible) as part of the deferred revenues and recognize it over the length of the subscription, typically a year.

Naturally the more annuity blades we bundle into our product the more we will see product revenues shift into subscription revenues.

Given the nice renewal rates we have seen so far, this is a positive evolution of our business model as more revenues become recurring.

Revenue distribution by geography for the quarter was as follows.

Americas contributed 44% of revenues, Europe with 40%, 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 larger deals.

Transactions greater than $50,000 stabilized and accounted for 65% of total order value compared to 64% in the same period a year ago.

We had 49 customers that each had transactions with a value greater than $1 million compared to 44 in the same period last year.

From an operating perspective we posted great results.

Our non-GAAP operating income was $213.7 million, an increase of 16% compared to the same period in 2010.

Non-GAAP operating margin for the quarter was the highest in the last six years and reached 60%, an increase of 2 points compared to the same period last year.

As you know, the fourth-quarter margins are typically the highest of the year.

GAAP net income for the fourth quarter of 2011 was $160 million or $0.75 per diluted share, up from $137.4 million or $0.64 per diluted share in the same period a year ago, representing a year-over-year increase of 17%.

Non-GAAP net income for the quarter was $178.1 million or $0.84 per diluted share, up from $156 million or $0.73 per diluted share in the same period a year ago.

Non-GAAP earnings per share exceeded the high end of our guidance in $0.02, representing 15% growth year over year.

Our cash balances reached $2.879 billion at the end of the quarter.

This quarter we generated $173 million from operating cash flow.

Our DSO, days sales outstanding, where 71 days compared to 66 days a year ago.

The increase is first and foremost a reflection of the strong Q4 booking which was also backend loaded.

An exceptional number of large deals which tend to close at the end of the quarter contributed to the strong quarter but also the increase in DSOs.

During the quarter we purchased approximately 1.32 million shares for a total cost of $75 million as planned.

Now let's take a look at our 2011 full-year highlights.

For the year ended December 31, 2011, revenues were $1.25 billion, an increase of 14% compared to $1.1 billion a year ago.

Non-GAAP net income was $613.6 million, an increase of 16% compared to $528 million in 2010.

Non-GAAP EPS for 2011 was $2.87, an increase of 16% compared to $2.48 in 2010.

On the operating side, we achieved non-GAAP operating margin of 58% for the year, up from 57% in 2010 and 55% in 2009.

That was as a result of our focus on efficiency and productivity, but driven mainly by the higher revenues we achieved for the year.

For the year the cash flow from operations has reached a record $715 million.

Now let's turn the call to Gil for his thoughts on the fourth quarter and the year.

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

I am very glad to summarize this great quarter and excellent year.

We just closed our best quarter and our best year ever.

From a financial perspective you can see that we overachieved our projections for the year and have been over or towards the top end of our guidance every quarter, which is a direct result of superior execution by our team and share gains in the marketplace.

But beyond the financial results we have also made a lot of progress this year.

We have seen a strong momentum in our annuity software blades business which has allowed us to increase the effectiveness of our customers' network security by enabling them to further consolidate their security infrastructure.

Our IPS software blade is now the most popular IPS system in the marketplace; our DLP now boasts an installed base of all most 1,000 systems.

New blades, like our application controllers, have been well received by customers while also contributing to our product leadership.

The outcome of that is not just better security for our customers, but also a very nice contribution to our financial results.

Revenues from software blades are now approaching 10% of our revenues.

This continues to be a positive and now significant evolution of our business model.

Keep in mind that it also slightly change is the timing of our revenue recognition as small revenues is deferred from this quarter to future quarter and from the product revenue line to the services line.

The software blade model also allows us to continue and innovate and drive more and more functions to many customers.

Last quarter we introduced an industry first Anti-Bot Software Blade which will help combat the growing risk of computer bots.

Computer bots are software agents that conceal themselves inside computers and networks and are the key components of the most sophisticated attacks in recent years.

The Anti-Bot Blade is expected to be shipped in the first half of 2012.

Another contributor to our success are our security appliances.

By integrating the software blade architecture with strong and flexible hardware appliances we are able to give customers an even more consolidated solution.

In Q3 we entered an additional segment of appliances, the super data center, with our 1 terabit-ready 61000 system that was introduced in August.

It's approximately 10 times faster and with an average selling price which is five times higher than any system we have produced before.

In the fourth quarter our sales of this system surpassed our expectation and it looks like this success is continuing into the first quarter.

Finally, in the fourth quarter we renewed almost our entire appliance product line with seven new models that boast three times more performance for a similar price point.

Introducing such a broad set of new products that impact revenue in one quarter is a very significant step that carries many risks in it.

I am glad to report that it was very successful.

Since its launch over 60% of our enterprise appliance's revenues already came from this new model.

In both the high end and low end we encountered tremendous success in the low to mid range of our appliances, and we have seen over 50% growth in units compared to the previous fourth quarter.

In the high end it looks like we are winning even more projects and gaining share.

Finally, more and more customers choose to buy our premium support packages which together with the annuity software blade help drive our deferred revenues.

Geographically, the Americas and Asia and Middle East drove the growth while Europe had a good year and a great fourth quarter despite the macroeconomic challenges for some European countries.

This brings me to the financial outlook.

As you know, it is always hard to predict the future while there are many factors that weigh in on a strong outlook, especially the heightened level of cyber security, our new products, and our recent market share gains.

There are also many factors in our world economy that would warrant a more conservative approach.

As always, we took a realistic approach that has risks in it as well as potential of upside.

For the entire 2012 we expect revenues in the range of $1.345 billion to $1.395 billion.

Earnings per share are expected to be in the range of $3.10 to $3.20 per share.

For the first quarter we expect revenues in the range of $305 million to $315 million and EPS in the range of $0.69 to $0.73.

GAAP EPS is expected to be $0.08 less per quarter and $0.30 less for the year.

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

We are excited as we enter into the new year.

With that we can open the call for your questions.

(Operator Instructions) Eyal Shaul, Oppenheimer & Co.

Good afternoon, guys.

Good quarter, good year.

Gil, on the 61000 and 21400, you indicated on the press release and also in your prepared remarks that business is absolutely fine.

Can you help us out, maybe you and Tal, with some more kind of quantitative data, if you can do that with us?

Or if not at least qualitative?

On a qualitative basis, as I said, we had more sales than we anticipated -- in the 61000 we actually had the pressure that we have more orders than we can ship -- and I said it's even continuing into the first quarter, which is a very good phenomena.

It's early.

I mean usually in the first quarter we can't say much about these product lines, but on the 61000 we already know that we have a nice -- some nice wind and some nice pipeline still coming in.

So -- and that is, by the way, a set of products -- the 61000, keep in mind, it's a very small number of units and it's a very small number of builds.

But the nice thing, as I have said, with our very large deal and have nice revenue contribution.

Right now within -- we still counted in the millions of dollars and not tens of millions, but I think soon, within a quarter or two, we will start counting into two digits and not in one.

Let's put it that way.

Got it.

Any specific kind of verticals doing better with respect to those kind of two appliances?

Actually that is kind of interesting.

We were expecting a lot of sales in the telco sector and we have a very large pipeline in the telco sector, but our first deals were in various sectors.

I mean in retail, in healthcare, in professional services, insurance.

So I mean it's actually -- financials, too.

So I mean actually the first set of product that is actually very encouraging so that this is not a niche product for just the telcos or just certain kinds of customers, but high-end customers in many different sectors need this products.

And that actually was a surprise for us.

Got it.

Tal, any foreign exchange tailwinds this quarter?

Yes, it's a small one, so bear in mind we are usually hedging in the beginning of the year so the affect is only on the portion that is not hedged.

I would say probably between $1 million to $2 million, which is $0.005 or so.

Got it.

Thank you very much and good luck.

Thanks.

Brad Zelnick, Macquarie.

Thank you and congratulations on a great quarter, especially as we look at billings growth which well exceeded our estimates and where I think the Street was.

But as we look out for this year and the guidance that you have given us, Gil, can you give us a sense -- the business is making this transition, annuity blades are doing really well, your deferred revenue is growing really nicely.

Can you give us a sense of what deferral rates you are assuming in the business and how that plays out over the year as we put our models together?

I can't say from the top of my head.

As I said, I think we are seeing a lot of healthy trends, but we are also seeing a lot of challenges in the macro economy in certain countries.

Actually, if you look around the world, while I think again we are doing well and the world is doing okay, I can't think about too many economies that are exploding or are showing very, very high growth in the economies themselves.

So I don't want to push that.

I think if you look at our projection for the year in general we are kind of the same projection that we gave a year ago, and I really want to be realistic on that.

There may be an upside to that, but there also may be a low side to that, so I don't want anybody to expect that we will repeat the same results every year.

We will do our best to produce the best results as always but I think we are very, very realistic around that.

And I think overall the software blades has done really well.

We have talked about it in previous calls, and as I said there is two trends on the annuity line.

One is more and more customers choosing our premium support packages, which increases the average price per customer, and the second one is the annuity blades that are coming both from bundled and unbundled software blades which are growing very, very fast.

And I hope -- again I hope it will continue to grow fast in 2012.

Thanks, Gil.

Tal, can you maybe just give us an appreciation across the mix of new product sales in Q4, for example, versus Q4 last year?

What is that deferral rate?

Because the collection of annuity blades that ships across the products versus what it was a year ago, I would imagine, has some impact on the way that revenue is recognized.

Can you maybe speak to that a little bit?

Sure.

I think the first indication is that if you look at our deferred revenues, typically deferred revenues -- if you look at last year, deferred revenues increasing, if I recall, 9% and the short-term increasing 10%.

If you look at this year, the short-term increasing 16% and the total, including the long-term, increasing 19%.

So you can see there is a very significant growth in deferred revenues and there is two reasons for this.

One, we do have a growth also in the regular updates and maintenance as many customers move to premium, which is great, but software blades (inaudible) increase significantly as well.

As the growth in the software blades is significantly faster in terms of bookings than the growth that you have in the update and maintenance then its portion out of the deferred is increasing.

So I will say its portion is probably much more than doubled in the deferred revenues, but it's still not 20%.

It's probably around 10% or so.

My last comment is we have been now looking at you more recently on a billings basis and on those metrics your performance has been great.

Would you agree that that is a fair way to measure your performance and it's consistent with the way that you manage the business?

I think you need to look at the consolidation of the parameters.

You need to look at the total revenues as there is a shift between product and services and it depends how we introduce new products, so it can go either way.

Right now it's going into the services.

So I would say look at the total revenues and to have the complimentary picture look also at the deferred.

So that is obviously the top two metrics to look at together.

Thank you very much.

Daniel Ives, FBR Capital Markets.

Good quarter.

Gil, could you just talk about in terms of anything that you saw in the field that surprised you one way or another in terms of the US geographically, vertically, and going through customers?

I don't know if there is many surprises.

I think mainly continuous of many trends.

So for example in the US we had very strong year, very strong fourth quarter, but it's like the third year in a row that the US economy, at least in our business, is doing quite well and driving growth.

It was wonderful to see such a large region and such a large country showing very healthy growth rates.

As I said, in our high-end system I was very pleasantly surprised to see the customer mix really from all sectors and all different areas, not just focusing on the traditional.

Sometimes you expect high-end products to be telco and financial, and we have actually seen that our high-end products went into all the different sectors, which is a great sign to see.

Beyond that I think we have seen healthy results in many places.

In Europe I would say that many, many regions and countries look quite like -- actually the strongest and the largest economies in Europe performed really well in the last quarter, so that was very nice to see.

Nothing much I think I can say beyond that.

And just last question.

The last few years you have exceeded the high-end of guidance by a nice margin.

Obviously not saying one year is going to have a bearing on another, but did you take this same approach to this year's guidance as you have the last few years, just in regards to macro?

Obviously the product shift factors in, but just understand is it the same quantitative approach?

I think we are using the same methodologies to give our estimates, but I would absolutely say you will have to trust us for that.

We are very, very realistic in what we give.

We don't keep kind of something in our back pockets.

We don't try to downplay the numbers in order to beat them.

We are really, really giving very, very realistic approach which we believe in, which is based on what our field is telling us and so on.

So I definitely think that if I look at the challenges in security that the world has that we have upside.

But if I look at the economy and if I look at also many, many other internal parameters, there is also that makes the assumption realistic.

So I won't push anyone to think that we are trying to drive down guidance in order to beat it.

Again, I hope that we will keep the same trend that we have done in the last few years of beating our estimates, but there is absolutely no guarantee to that.

It's not easy and our sales people and our developers they are working very, very hard every quarter to make that happen.

So not (multiple speakers) downplaying anything.

Okay, thanks again.

Phil Winslow, Credit Suisse.

Thanks, guys.

Another great quarter.

Clearly based on just the deferred revenue upside that you showed as well as the commentary on just large deal bookings, it seems like you guys are seeing sort of a meaningful uptick over the past couple of quarters in blade adoption.

Gil, just wondering if you could provide us a little bit more detail on sort of which blades you are seeing the most interest from customers, and if there is any sort of difference between sort of the larger organizations versus more midsize.

Then also just finally from a competitive standpoint, I mean who do you see yourselves going up against?

I mean a lot of new people are trying to enter in the firewall market from IDS or the networking world, and then you have some traditional firewalling players.

But when you look at the next-generation firewall space, who do you see yourselves going up against and why are you guys winning these deals?

Thanks.

So first the two blades that drive a lot of our blade business.

I mean all the blades have good contribution and nice growth; the two biggest ones are IPS and now our application control.

The application control is only the first year but it's a very good first year.

The IPS it's a second year and continuing the trend that we started before with previous technologies and its wonderful results with the new IPS blades.

So these are the two biggest ones.

As I have indicated, also DLP is nice and URL filtering.

We have more potentially here and we can do more in new sub segments of the security space with the blades.

Who are we competing?

I think we are competing with the same big vendors that then before, the networking companies -- Cisco, Juniper.

There is several midsize companies in our marketplace and they are still there.

I don't see much I mean -- the discussion about IDS companies getting into our space I don't see that.

It's not -- the competitors in our marketplace are the core players of the market.

It's not some announcement; at least we haven't seen that.

I don't want to discount anyone, but we haven't seen companies from outside our market enter that.

Yes, there are some small emerging companies that are doing quite well and I think we win very well against them with products that work better, with much better management, with much higher level of security.

I think we are seeing that in a lot of competitive bake-offs and in some very, very large customers that chose that somehow they like the message of a new thing, a new approach, but then would scale down to [lab tests] and we have sending sophisticated attacks.

I think we have seen that many customers that chose us or companies that have switched back to us in some cases.

So these are some of the key elements that we have in the marketplace today.

Maybe I will just add that in each blade you can compete with different players, but when you compete on the total consolidated platform that naturally narrows significantly the number of players that compete.

Great.

Thanks, guys.

Tal Liani, Bank of America Merrill Lynch.

Just have three questions, but the first one is a housekeeping question.

Your tax rate was above what you said before and your R&D expense in dollars went down sequentially as well as year over year.

If you can, discuss these two for the next year and for the next few years, especially the R&D expense.

Wouldn't you expect that when revenues are not recognized and are being deferred the R&D expense, as a percentage of sales, will actually go up?

I would just say it's not working exactly as an Excel file in reality in the sense that percentage can change each quarter.

It's a live business.

Taxes are actually completely in line with what I say every quarter.

I always say it's around 20%, 21%.

It can go down 1%; it can go on 1%.

This quarter it was 21%, which I think it was in line also with Q3 and most of the other quarters.

So between 20% and 21% it's in line with our plan.

Again, I will say again it can go up 1%; it can go down 1% in general.

In terms of the R&D expenses, it's affected by a few factors.

On the one hand the number of people; on the other hand the average salary and what happens with the dollar since the -- as the dollar getting stronger and significant part of R&D people are in Israel it reduces the cost of the R&D in our report.

And it's not linked necessarily to a percentage of our revenues.

Also, bear in mind that if our revenue is growing more than we planned then it's many times, as we have seen in the last two years, allows an expansion of a margin although it's not our plan and not what we are aiming for.

Operating margin you can see this quarter it moved up to 60%.

It's typical that in Q4 the margin will be significantly higher, exactly because your expense level is very similar to previous quarters but the revenues are increasing significantly so typically.

Maybe I will simplify it a little bit, at least in the R&D.

The R&D is mainly fixed expense based on the headcount and again the dollar rate.

We did expand the headcount in the R&D, so we actually had more people developing our products at the end of 2011 than we had in 2010.

I think what limits us right now is not the margin or sales growth; it's the ability to find really, really excellent people.

Right now we have a very strong focus on large recruiting of top talent and that is a major focus for 2012.

I think the major financial impact of that will actually be in 2013.

But if we recruit people in 2012 most of the spend and the expense of that will have an effect where it will work for a full year in the Company in 2013.

We would like to hire now with many good people as we can, because that drives better products and at the end -- in the long end it drives more revenues from better products.

And just to translate that in terms of your projections going forward, as we say many times we are not aiming to expand the margins.

So you can see also in our guidance it assumes very similar margin to the average you have seen in 2010 and 2011, and you can see the EPS ratio versus the revenues.

Thank you.

You spoke a lot about premium services on the call and as a prime reason for the growth in deferred revenues.

Can you discuss what is the premium versus, quote-unquote, regular service?

And then what is the rationale, what is the reason for customers to upgrade to premium versus regular?

And if you have any percentage, like for example what is the percentage of customers that are taking premium versus what is the presented of customers that are taking regular?

I don't have the numbers of the percentage of customers but I explained the differences between the services, premium services are general services like 7 by 24 support instead of regular business hours.

With the new appliances there is even more value and premium services; things like on-site support, accelerated delivery of replacement products, and things like that that are producing additional revenues from services.

Some of them come with a little bit more cost on our end; some of them come with a lot of costs on our end like on-site support and on things like that.

And I think that customers -- I think the reason for that is I think our products are mission-critical in many places.

I think it's taking a little bit more support direct, and I think overall it's customers seeing value in that.

They see that they get good service and they need that good service.

That is one of the factors in the deferred revenue.

It's not the primary reason.

It's the [softer blade] is bigger than that, and there are other factors too that help that, but that is clearly a nice shift that we have seen this year and we are very, very happy with it.

Just last question about something you said before about competition.

The new datacenter product, do you see the same competition that you have seen before with the traditional lines of products, or do you face now new types of products or new types of competitors?

Not new types of competitors.

Not all the competitors in our marketplace have solutions in this category.

I would say that two of them did, and I think we are competing now very, very well against them.

And before our play in that market segment was small.

So I think that is why we are calling it an expanded market segment.

We were in the market; we were in network security and so on.

It's just that when a customer wanted a multi-blade, the multiple hundreds of gigabits solution, we had to work mainly with partners.

Now we can really drive the security level and the performance level, and again with a very nice market segment where we know the customer.

The customers are our customers, and they are very, very happy to stay with us across the product line.

Thank you.

Shelby Seyrafi, FBN Securities.

Thank you very much.

So can you talk about whether the Company is ending support for the Nokia appliances this year and just whether this could drive an upgrade cycle better than expected this year and next?

We are not ending support for any product.

We actually, I think, our customers want and will give them a lot of longevity in terms of supporting their product.

We are also not ending the sale of these products, and again we will have a long sales cycle.

What we do see for the first time, and maybe that is one of the things you are hinting through, is that we have a new operating system that is not released yet that will give the customers the same experience as they had with the IP series, the previous Nokia appliances from the general checkpoint appliances.

Now with the new series of appliances that will be unified will combine all the good elements of the previous IP series, of the previous Check Point appliances.

Three times more performance, which means much better price performance, and with backward and forward compatibility for operating and a lot of new features.

I think that 2012 will be the real year of the start of the change, start of a major change of the IP series loyal customers shifting to the mainstream Check Point appliances.

And I think that will definitely make us even more competitive than we were before.

So this new OS is this coming out in the first half of the year, and how big a deal is it in your opinion?

I think customers are really expecting the new operating system and there is a lot of buzz from customers that they want it.

It's, I think, supposed to go out in the first half of the year even though an operating system is something very, very complicated with a lot of impact.

So it can come early, it can come earlier, it can come later and so one.

And I also don't expect the shift to be an overnight shift.

I expect the shift will take between a year and two years, but still I think when we went into the IP business we thought that customers will very quickly shift from the old models to the new models.

We have actually been very pleasantly surprised at how loyal customers are to the IP series appliances and how long they stayed with them and how strong was the revenue stream that we generated through these appliances.

I think the last quarter and the next two, three quarters are marking the beginning of the change.

Again, it's a very, very positive change.

It means that we will have more unified product lines, more unified R&D operations, better operational costs, and so on.

So I mean it's a very -- and much better for the customers that will have a single platform from Check Point and not two platforms from Check Point.

So I think the change is starting right now and will take between a year or two.

Okay.

And last one for me if I can.

Two of your faster growing competitors are Palo Alto Networks and [Forenet].

Can you talk about how your win rates have improved versus these guys since your early October announcements of the 61000 and 21400?

Thank you.

I don't know that we track the win rate, but I think we feel very, very good about that.

I think they are both good companies and produced, at least from what we can see, very strong results in recent years, but I think we are very confident about our ability to compete.

Our win rate is actually increasing.

It's not just a result of the 61000 system; it's the entire product trend.

It's the new appliances that are faster.

It's the application control.

It's the Anti-Bot Software Blade that is coming to market.

It's the overall integrated architecture.

It's the total management.

And I think the maturity of our product tells us that -- makes us a very big -- makes our customers very loyal to us and makes new customers weighing Check Point more than they have done before.

And I think so far it's working quite well.

Gregg Moskowitz, Cowen.

Thanks.

Had a question on your guidance for 10% revenue growth this year at the midpoint.

You have spoken often about the increasing shift to the balance sheet from software blades.

I know you don't provide explicit product revenue guidance, but can you give us a sense of how you expect product revenues to perform this year relative to your total revenue growth?

We had a previous question regarding what you should follow and that is why I said look at the total growth in revenues exactly because there can be shift.

Naturally, according to the situation as of today, lower growth in product, higher growth in service as you have seen in 2010 -- in 2011, which is the same phenomena.

So I would assume less in product, more in services in general.

Okay.

Then, Tal, just a follow-up.

I know a couple of quarters ago you were targeting $150 million in bookings from blades in 2011.

From what we can tell, you were tracking a fair amount above that.

Was just wondering how the year ended up in terms of the total contribution from blades?

I think we have reached what we have estimated.

We have topped that; I think we are at the run rate that is even higher than that and I think we are very happy with that.

That is again better than what I anticipated a year ago or more than we have started a top-tier blade business.

Okay, thank you.

Brent Thill, UBS.

Thanks.

Gil, just on the cash position, clearly you have been building for quite some time but now you are approaching $3 billion.

Can you give us your view on 2012 on your thoughts on capital allocation between the potential dividend buyback and M&A?

Right now there is no change.

We had a policy that has approximately $300 million in buyback program per year, and that was based on a lot of shareholder feedback that we have got.

I think almost every Board meeting we are reviewing that.

And based on the feedback that we get and based on our capital, we decide what to do with it and we will continue in that.

So right now there is no change and we will continue to review that.

Just a quick follow-up, on the 61000 who do you view as the primary competitor today that you are seeing in the field?

I think I would rather not name and not give credit to our competitors on that.

There is one vendor in the marketplace that has been the player in that category and I think by now we have seen great success in the marketplace against or replacing them or in their accounts.

Actually many, many customers in the past just told us we really would rather have your product but you don't have a product.

So it was for us a long development process to come up with such an architecture.

It's not just a bigger box; it's very sophisticated architecture inside that box with many new components, hardware and software, [that didn't take this] before.

It's almost three years development that we have done.

So far I am very, very pleased with the results, because we have seen that the demand is higher than our supply and that the feedback so far is very, very positive with customers.

And not only that, these solutions in the marketplace are usually are extremely complicated and take weeks to install.

Our case we have been in situations recently when a customer really needed best performance and in one day we made the system work and operate (inaudible) their network.

That is something that in our industry or in the comparable products simply doesn't exist, so that I think will be the key to scale in the long run.

Thank you.

Walter Pritchard, Citigroup.

Gil, I am wondering if you can talk about the a la cart blade and what efforts you are taking to go into the installed base and if we should expect that effort to accelerate in 2012 as you have got more customers on new versions and appliances shipping that have much higher performance potentially get through some of the bottlenecks on loading multiple applications on a box.

The short answer is, yes, you are absolutely right; that is part of our strategy.

I mean we build stronger appliances which means that they can take much more load and can do more functions.

We go to our installed base and show them how they come.

We have -- like going to a customer on a certain function that is not our mainstream business and telling them you are paying now x number of dollars per year.

Give us a chance; we will save you at least 40% of your operating expenses if you will just by buy our blades.

And I think we can -- in almost all cases we can save at least that for the customers, sometimes even more.

Again, simplify their infrastructure; give them better visibility, a lot of other positive things that customers can get.

That is a very, very important part of our strategy.

And just to be clear, last year we have seen a lot of growth in what we call -- when we divide the blades we have part that is bundled with new products and we have the part that is unbundled with customers by a la carte, which is exactly what you asked.

We have seen very healthy growth last year in the a la carte, which means that customers like that model and buying into it.

Got it.

Then just one follow-up and one quick one, just a quick one on employees.

Tal, I didn't hear a number for the quarter; where are you guys in employee count?

2,471.

Great.

And then just on the Europe comments, I mean you did mention that some of the territories are tougher.

Your Europe growth has been good and not impacted materially by currency.

Are you seeing that geography -- is it worsening or is it stabilizing, or --?

I would love to hear any comments just on sort of the second derivative there.

I think it's kind of hard to predict.

If you doubt -- again that is why we are trying not to give too many comments on that because if you will ask me in the middle of the fourth quarter I would say that it's bad and it's very weak.

If you would ask me now, we had a wonderful Q4 and we had great results in Europe in the fourth quarter.

I think what I am saying is that it wasn't necessarily easy to achieve, but it also means that we have a very balanced business.

When I look into Europe and analyze it, it's definitely not looking like one market.

There are some segments are doing very well and had growth that is equal to the US and doing really nice.

And there are some other countries and some regions that have been struggling a little bit more.

Some of it, by the way, was also changing from quarter to quarter.

So it's not all one bucket and it's not quarterly stable.

So what does it mean in terms of what is the derivative of what, what I can predict for the future?

That is very hard to say.

I am careful on that because the fact that we have seen a mixed feelings and mixed results in previous quarters means that it can also happen next quarter, but we can be surprised for the good and vice versa.

Thank you.

I think I would just say that Europe, unlike the US, -- the US is obviously one economy and we have seen it consistently strong for a few years, while in Europe I would say it depends on which countries.

Some do great, some do less and then the next quarter it can turn.

Southern Europe, as we told you, wasn't great last quarter and wasn't great this quarter as well.

So I will say I am more cautious about Europe as we all read the name same newspapers and see the same economies, and I will be more careful in Europe.

But Southern Europe is also our smallest region of Europe.

Sure, Southern Europe is quite small for us.

But if you look at Central Europe, Northern Europe for us are the big markets and the big economies and they did last quarter very, very well.

Great, thanks.

Aaron Schwartz, Jefferies & Company.

Thanks for taking the question.

I just had a sort of follow up on what is driving the acceleration in deferred.

I know that you mentioned a few things, but in terms of the annuity blades, can you provide any more detail on whether it's the bundles on the new product offerings, the a la carte blades, or even the renewals off last year?

I am sure it's a combination of all three, but can you sort of rank what is having more of an impact on the acceleration in deferred?

The short answer is all of them.

We analyze it very, very carefully and they reason we are so excited about that is because it's not that one drives the other.

They are all going swell.

The bundled one are obviously -- it's good thing to see that customers like that.

But the good news about it -- the bundled one is bundled with the product so the customer has -- there is some choice, by the way.

It's not that the customer doesn't have a choice.

They have a choice but it's more limited between the model.

The good news about that and the reason we are so optimistic is because the renewal rate for the bundled one is higher.

Investment after the customers have used the blades or have the blades bundled or, for their perception, for free for the first year they actually decide to renew them in very high percentage the second gear, which is the main criteria for success and the main criteria for longevity of that.

At the same time there is a lot of customers that finds their first year, their a la cart blades.

So I think it's all three elements that are doing quite well.

Okay.

And I know long term deferred is still a smaller component there, but it did show a little better growth.

You mentioned the annuity blades are mostly one years.

Is the premium support sort of going out longer than one year?

What is driving that long term?

I think many times also you will see in Q4 that you have some longer contracts.

You had the same phenomenon also last year.

It really depends -- each quarter it can happen; it can go down and go up so I would less look at the long term.

I would look more in the short-term growth.

So it has a very strong quarter.

There was a few long-term contracts, which is great, and we had the same, if I recall in last year -- no, actually in last quarter, in Q3, growth as well.

You see in last quarter also it grew 41% and this quarter it grew in 52%.

So just I guess happy customers (multiple speakers).

(multiple speakers) like to commit for a long time.

That means that they think that they will use the products for a long time and they think that they get good economical value from this program they buy a long-term contract.

I think it's very positive.

That frees up our people to worry about doing more with more customers rather than renewing the same contracts.

So I think it has a good contribution for everyone.

Okay.

Last question for me if I could.

In terms of the head count, in terms of the absolute numbers that did accelerate in 2011, can you talk about your hiring plans for 2012?

The way you talked about the expenses hitting in 2013, does that imply that your hiring is going to be a little more backend loaded in the year?

Thank you.

I think we are going to make -- hiring it's kind of the same phenomena.

We always want to hire the people early on so we will have more contribution earlier to the Company.

At the same time it always takes longer to find good people and so on.

Remember that in terms of the expense if we want to hire people in the first half of the year that means that our impact on the first half of the year will be one month, two months from the average.

If you hire all the people in January then, yes, they will have contribution for five months.

But we already know that we haven't found that we won't hire too many people in January and that means that most people will join us between March and May or March and June even.

That means it will have little impact on the first half of the year.

And remember one more thing, in the headcount side that people leave mainly in the second and somehow in the third quarter of the year.

So somehow it all balances out and the new hires have -- the real impact of our new hire affects only the following year.

Bear in mind, by the way, that typically the increase is coming in the second half.

When you look budget-wise into next year the recruitment the second half of 2011 you will see the full effect in expenses in the first half of the year.

Great, thank you.

Jonathan Ho, William Blair & Co.

Just a quick question around the product refreshes that you guys had talked about.

Aside from the high-end product launch, can you give us some color on how much of an impact that three times greater performance had in terms of your core products and whether we have seen the full impact of that product refresh in your results at this point?

It's hard to tell what impact it has.

Mainly we check what customers are replacing.

Now there is two things that can happen here.

One is that everything continues the way it was before.

Instead of buying, I don't know, an appliance for $20,000 the customer buys a new one for the same $20,000 and gets three times more performance.

That is one impact and that is, of course, the desirable impact.

Actually the desirable impact is that more customers decide to buy the $20,000.

The risks are the following.

One risk is that enterprise customers are fairly conservative even when they see something new they want to evaluate it first and to certify it first for their environment.

And that takes time.

So in some cases that can slow down procurement because they will need to recertify the new appliance, so that is one reason.

The second reason that customer would say (inaudible) I was price sensitive.

Instead of buying an appliance for $20,000 I can get better performance for, let's say, $12,000.

And that will be good because it will make us more competitive but it will hurt short-term revenues.

So far analysis shows that on most models and on most segments things behave very, very well.

We have seen an increase in the number of units.

We have seen stable or hire ISP per category, and for almost all categories that was the case.

We have seen maybe one category that we are thinking that customers are deferring their purchases and want to do more testing or consider the shift between various models in the series.

But I would say that for four out of five series as we have seen the shift going extremely smoothly and extremely well.

And just remember, this is only the first quarter so it's too early to conclude too much out of it.

Got it.

Just one quick follow-up.

It's more of a clarification around your IPS renewal rates.

Are you guys seeing any differences in the second renewal versus the first renewal now that you have lapped the product for a year at this point?

Is that materially higher, especially for the IPS blade, once somebody has already renewed it once on that second go around?

I think it's slightly early in the sense that the third year is actually starting only in this Q4 and we didn't have the opportunity to analyze that.

Because if you remember we launched this in Q3, Q4 2009 so Q4 2011, which was this quarter, is the quarter that you can check it for the first time.

So I would say it's too early.

But I think generally that you are right.

Customers that got something bundled their renewal rate is lower than the customer that is already paying for it and wanted that.

And on the sales side, we were pleasantly surprised by the customer that responded and renewed.

The third year, like Tal said, is higher from all the data that I have seen so far.

A customer that has already paid for something once, they renew at a rate which is pretty high, like the top quartile of percentage.

And customers that had it only for sort of bundle will renew in a percentage that is let's say between 40% to 60% which is very, very high.

This one is, by the way, the surprisingly high number.

Great, thank you.

Great quarter.

Thank you, guys.

We appreciate everybody joining us on the call and look forward to talking to you during the quarter.

Take care and have a great new year.

Bye-bye.

Thank you.

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