Check Point Software Technologies Ltd (CHKP) 2012 Q1 法說會逐字稿

Greetings, and welcome to Check Point Software's first-quarter 2012 earnings 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, Kip Meintzer, Head of Global Investor Relations for Check Point Software Technology.

Thank you.

Mr.

Meintzer, you may begin.

Thank you, Melissa.

Good afternoon and good morning.

I would like to thank all of you for joining us today to discuss Check Point's record financial results for the first quarter of 2012.

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

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 www.CheckPoint.com.

For your convenience, the conference call replay will be available through May 1.

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

Before we begin with Management's presentation, I would like to bring the following to your attention.

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 our taxes in Israel, our expectations regarding the introduction of new products and programs, and the success of those products and programs, and last, but not least, our expectations regarding our business and financial outlook for the second quarter of 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 27-A of the Securities Act of 1933, and section 21-E of the Securities Exchange Act of 1934.

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

Factors that could cause or contribute to such differences include the risks discussed in Check Point's annual report on Form 20-F for the year ended December 31, 2011, which is on file with the Securities and Exchange Commission.

As a reminder, Check Point assumes no obligation to update its forward-looking statements, except as required by law.

In our GAAP press releases, which have 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 a presentation of non-GAAP information.

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

Thank you, Kip.

Good morning, and good afternoon to everyone joining us on the call today.

I'm happy once again to begin the review of the first quarter of 2012.

Our revenues for the first quarter increased by 11% and were towards the high end of our projections.

Non-GAAP EPS was $0.74, representing 16% growth year-over-year, and $0.01 above the top end of our guidance.

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

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

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

In the first quarter, revenues reached $313.1 million, towards the high end of our projections, representing an increase of 11% compared to $281.3 million in the first quarter of 2011.

This growth was driven by all our business elements.

We sold more products, had growth in support services, and a continued significant increase in Software Blades.

Towards the end of last year, we launched our new appliance line.

It was received with great enthusiasm in the markets.

Approximately [80%] of our enterprise appliances sold this quarter from the new product line.

Our new data center products did great as well.

With 61000 revenues doubled relative to Q4 2011, and the 21400 provided significant contribution this quarter.

Our software updates, maintenance, and service revenues reached an all-time high of $202.9 million this quarter, with an outstanding growth of 15% year-over-year.

The growth was driven by our new Software Blades that are recognized as subscriptions.

Deferred revenues as of March 31, 2012 were $542.2 million, an increase of $82 million, or 18% over March 31, 2011.

Short-term deferred revenues increased by 15%, higher than seasonally expected.

We had growth in revenues across all geographies, with Americas and Asia-Pacific leading the growth.

Revenue distribution by geography for the quarter was as follows; Americas contributed 45% of revenues, Europe was 38%, and Asia-Pacific and Japan, Middle East and Africa region contributed the remaining 17%.

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

We had 34 customers that each had transactions with a value greater than $1 million, compared to 27 in the same period last year.

Transactions greater than $50,000 accounted for 60% of total order volume, similar to last year.

From an operating perspective, we posted great results.

Our GAAP operating income was $172.9 million in the first quarter of 2012, an increase of 22% compared to the same period in 2011.

GAAP operating margins for the quarter was 55%, an increase from the 50% in the same period last year.

Our non-GAAP operating margin this quarter reached 60%, even after the fourth quarter last year, which is the highest in the last six years.

This represents an increase of 3 points compared to the same period last year.

It was achieved primarily as a result of our top-line performance, and the tailwind from the strengthening of the dollar against other currencies compared to the same period last year.

This year, the new tax reform in Israel came into effect.

The reform simplifies the tax structure, reduces many tax uncertainties, and lifts the tax limitations of cash distribution from future income.

As a result of the reform, the effective tax rate in our P&L is expected to reduce next year, while we will see an increase in tax payments.

GAAP net income for the first quarter of 2012 increased by 18% year-over-year, from $122.1 million, or $0.57 per diluted share to $143.6 million, or $0.68 per diluted share.

Non-GAAP net income for the quarter was $156.9 million, or $0.74 per diluted share, up from $137.1 million, or $0.64 per diluted share in the same period a year ago.

Earnings per share exceeded the high end of our guidance, representing 16% growth year-over-year, with record cash from operations this quarter of $275 million, an increase of 30% from $212 million in the first quarter a year ago.

This was mainly as a result of excellent collection of last year bookings, as well as positive cash effect of our balance sheet hedge.

Our DSO is at 72 days, similar to the previous quarter.

During the quarter, we repurchased approximately 1.3 million shares of a total cost of $75 million.

Finally, our cash balances crossed the $3 billion bar, reaching $3.121 billion.

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

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

Tal has already addressed the financial results for the quarter and I'm glad to meet with you with these good results.

As Tal mentioned, we saw very nice adoption for our new appliance line.

We've seen a very nice growth in midsize appliance units and in the super high-end system.

Software Blades also continued to grow nicely and are becoming more and more substantial part of our business.

As you'll hear in a second, we are continuously adding new Software Blades to our portfolio to elevate the security we provide to our customers.

We opened the second quarter with some major announcements for the year.

The most significant one is the introduction of ThreatCloud.

With the need for more collaboration in fighting cyber crime, it appears obvious, we belief that ThreatCloud is the first and only such initiative in the marketplace.

With the underlying challenges facing cybersecurity, we find it takes a very long time, weeks and even years, to identify some attacks.

Attacks will usually appear in many places, yet today's organization is alone in trying to analyze and combat these attacks.

The result is that even after an attack is identified by a customer, most of the world remains unaware and unprotected.

This can be changed through collaboration.

An attack that's been identified by one gateway somewhere in the world can turn into a warning sign to the rest of the world.

This is the idea behind ThreatCloud, creating the world's first collaborative network to fight cyber crime.

Gateway participating in ThreatCloud will be able to contribute to the network.

When they become aware of a new attack, we'll update the ThreatCloud and all of our participants in the network will be able to quickly detect and block the attack.

In addition, ThreatCloud employs a network of sophisticated sensors in key places in the internet in order to further identify threats.

This collaboration should shorten the response time to attacks from days, weeks, and even months to hours or even minutes, and extend the scope of addressable threats by orders of magnitude providing for great breakthroughs in cybersecurity.

ThreatCloud isn't another long-term vision.

It is actually working now and is part of R75.40 software which we released last week.

It powers our new Anti-Bot Software Blade, which is now shipping in our enhanced Antivirus Software Blade by providing threat updates directly to customers gateway, enabling them to enforce preemptive protection against advanced threats such as bots, APTs and other forms of sophisticated malware.

ThreatCloud is only one part of R75.40.

R75.40 has over a hundred new features in all areas of management and security.

One of the most important features is our new secure operating system, GAiA.

GAiA combines the two operating systems we had in our product portfolio.

The Nokia IP operating system and the SecurePlatform.

Both offer some unique characteristics and have earned some loyal customers.

Loyal IP [Curis] customers were reluctant to move to our newer appliance model who didn't run the IP operating system.

Now with GAiA, these customers will be able to move to our unified product line, taking advantage of our familiar interface and all the features we needed and getting the benefits of the great new platform we provide.

Many customers have been waiting for GAiA for a long time and it seems that the reaction so far is very positive.

We made this announcement last week on our Check Point Experience Partner and Customer Conference, which we held in Orlando.

It appears that the new announcements were very well received.

In terms of numbers, as we are all aware, there are always risks in predicting the future.

That being said, we continue to expect good performance for the year and we are maintaining our annual and quarterly projection.

Specifically, for the second quarter, we expect revenues in the range of $324 million to $336 million, and non-GAAP earnings per share in the range of $0.74 to $0.77 per share.

GAAP EPS is expected to be approximately $0.07 less.

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

We had a great first quarter and we look forward for the remainder of 2012.

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

(Operator Instructions)

Shaul Eyal, Oppenheimer.

Good quarter, two quick questions on my end.

I know you Tal provided some good color about the 61000 and the 21400, but maybe, Gil, can you provide us with more color, recall that last time you talked about I think it was kind of the retail vertical that was kind of a little strong.

What have you seen this quarter, how has the ASPs been trending on both those products?

The ASPs in the high end actually were very good and specifically for the 61000, we had some very, very large deals that drove ASP up.

I don't know if it can continue for the future, but people boast fully populated systems that are relatively costly.

Our [best bet] I think we've seen a good mix of gateway.

I think I mentioned in my part that where we saw a nice increase was actually in the low to midsize gateway, an area that we didn't necessarily focus on.

But I think with our latest appliances, the 2012 model has done a great job in making us very competitive in that segment of the market, so that's where we've seen a big advance in terms of units.

Got it.

And Tal, one question for you.

Operating margins, strong I think for the second consecutive quarter now.

Probably had 60%.

Is that the type of metric from the operating margin perspective we should be thinking about down the road?

What's behind this continued consistent of the operating margins?

We used to think about it more mid-high 50%s, but 60% appears to be coming the new norm.

I wouldn't call it the new norm.

It's two quarters, you're right.

Remember that Q4 is typically higher margin than the first quarter, so Q3 and Q4, typically higher margins than Q1 than Q2.

So Q4 is not indicative.

Q1 was a higher margin, as you can see.

Two reasons for that, and one is we continued to perform in our revenue growth.

It allows us to see some improvements as a result of the leverage in our business model.

We did have tail winds from the dollar.

Q1 this year, the average of the dollar versus the average in Q1 last year was higher, meaning the dollar got stronger versus last year, which meant that it allowed to improve the margin.

I think it gave us around $2 million, $3 million this quarter, so take that into account.

You can't predict that it will continue in the future.

That's why I don't want to commit to that type of percentage.

And we also had some -- as you know, a company event in Mexico this quarter which means that the, around two weeks out of the first quarter, we had lower levels of expenses.

So I wouldn't make that as the new mark.

And as you know, so we don't aim for increasing the gross margin or in the operating margin, we aim to continue and grow our business.

Fair enough.

Thank you very much.

Brad Zelnick, Macquarie.

Gil, with billings growing slower than they have in the prior six quarters despite the strong uptick in Software Blades, can you help put that in context and specifically speak to what gives you the confidence to maintain your double-digit revenue growth outlook at the midpoint of your guidance versus billings in, this quarter at least that are high-single digit, and I know you don't guide to deferred revenue, but how should we think about that as we put our models together?

Thanks.

First, we don't publish booking or billing, so I don't know how you gathered the data but in terms of our internal metrics, we actually performed very much in line with our plans for the year.

Seasonally Q1 is always the slowest quarter and then quarter starts to ramp up very, very quickly and I think that's what we exactly saw.

We met our internal plans, and again, I think we're doing, we're doing quite well against all our internal metrics.

Thank you, and just a quick follow-up for Tal on DSOs.

It seemed they were up very slightly sequentially from Q4, which is not the typical pattern in Q1.

Just curious if you can speak to the linearity in the quarter.

Thank you.

It's the regular phenomena, very back-end loaded.

I think it was quite similar, it was the 72 days according to my calculation.

I can tell you from the effects, collection is very, very good and nothing has changed in our collection pattern and you can see it very clearly in our cash flow.

This was the strongest cash flow ever, $275 million with 30% growth.

And as you know, the growth comes from the collection of the booking of Q4.

So DSO is one calculation.

Maybe it went up one day, but it's completely in line in terms of collection.

Thanks very much for taking my questions.

Sterling Auty, JPMorgan.

I actually want to follow on that linearity question.

While the quantitative, I agree with the DSOs, I'm just curious, qualitatively, Gil in terms of your conversations with the channel and customers, how did you feel demand developed through the quarter?

We've heard different things from different regions in terms of months that were really good and months that were sluggish.

Curious how you saw demand develop through the quarter?

I think the quarter went according to plan.

I think we've got the sales people made their forecast and the quarters are back-end loaded in the last few years, so there's no surprise in that.

Nothing, nothing really to report about that, and we expect, we expect good numbers for the second quarter.

Okay, and then one follow-up question.

On the high end, on the 61000, where are you seeing the biggest demand for that?

In other words, are these greenfield opportunities, or are these data center network security upgrades?

And what is it that you see you're replacing if it is an upgrade?

It's a combination of that.

I mean, it's not the upgrades, mostly not upgrades of all model year, but customers that really needed high-end performance and now can get it.

It was really a host of different usages.

There's some in the financial sector.

There are some that are used to fight denial of service attacks at very high rates.

I must say that -- I mean, we have government.

We have healthcare.

We have industrial.

We have financial.

There's many different types of different customers here, and there's no one kind of usage.

Again, this is not -- that's one thing.

Remember, this is not huge number of deals, because these deals tend to be very large, but their direction is very positive here.

Got it.

Thank you very much.

Robert Breza, RBC Capital Markets.

Maybe as a follow-on to Sterling's question, Gil, as you step back and talk to customers, you mentioned having some success at the low end of the market, what are you seeing across the landscape maybe from a differentiated perspective at the low end versus the high end, meaning are you seeing people redesign their networks differently today than maybe they were three years ago and how that's driving demand?

Thanks.

No, no big changes on that.

I think our latest product line that we announced at the end of 2011, the 2012 model is very competitive and customers are very happy to purchase the new model.

And I haven't -- we just had the Check Point experience conference in Orlando and I must say that all I heard was very positive feedback from channel.

I don't want to say that the channels are now refocusing, we're focusing on broader market segment, because that's not what I heard.

I do think that channels would still like to see large deals and on the same time, all our channels have a mix of customers and all avenues of the market and the only thing I can deduct is that we became more competitive and in places when we weren't really putting their big effort in the smaller deal, we are now much more competitive and we are just able to offer our models in an easier way.

I know on the high end, on the large deals, everybody's making a big effort to win and then we're doing really great.

And I think we have a lot of potential on the small to midsize deal and I'm glad to see that some of that potential starts to unfold.

Daniel Ives, FBR Capital Markets.

In regards to the change in the Israeli tax code, effective January 1, just walk through how you guys as well as the Board is thinking about the cash balance and just a timing of sort of things in terms of how you're thinking about things second half of the year.

In terms of the tax -- as I said, we adopted the new reforms.

It's coming into effect from the beginning of this year.

Positive effect all around in the sense that it takes away limitations on, on -- in case we would like to have buyback or dividend above certain amount.

As you know, from the newer income, we will be able to do it without having any tax effects.

It takes away many uncertainties that's existed in the taxes where we are, so that's very positive.

And as a result, the P&L tax, effective tax rate is expected to reduce in the next year or two and the cash tax payments will increase slightly as a result of that.

Thanks.

Aaron Schwartz, Jefferies & Company.

In terms of the changing product deferral rates with the success of the Blade series, is there any way you can talk a little bit more about your expectations for product growth?

Is sort of this mid-single digit growth rates are the right way to think about this for the remainder of the year, or do you expect it to accelerate off the Q1 level?

I would say first, and have been recommending that for quite a long period.

I would recommend to look first at the top total growth rate of the revenues.

Since it depends how we introduce new products, the more Annuity Blades we introduce, the more you should expect to see a shift from the product into the service line, as you've been seeing in the last year and a half.

So future product depends how we introduce them.

But in general, I would expect to see more services and less product.

But I think the growth rate can be higher than what it was this quarter.

I think the growth rate will be higher in future quarters.

So -- and again, maybe to explain a little bit what Tal says, when we bundle a new Software Blade with our appliances, with our product, then immediately, a big portion of the product sale is moving to the subscription line.

+And that's what's happening sometimes.

Now, it really depends, because we tend to change from time to time the bundling of different Blades with different model.

It's -- I mean, bundling more Blades creates great long-term opportunities, because the customers get them almost for -- bundled for the first year and then they renew from the second year.

So that has a positive effect.

It has less positive effect from the standpoint of the growth of the product line and less positive effect from the standpoint that we don't take full advantage of selling these Blades at full price when we start.

And that's why we are all the time trying to create this right bundle to create the right incentives.

So that's the main question, but it's harder for us to answer, because with new models and new Blades, we're playing with these all the time.

But again, just to be clear, I think that for the remainder of the year, we can see higher product growth rate than we've seen in the first quarter.

Okay.

That's helpful.

And second question, if I could, now that you have a little longer track record for your IPS Blade, do you have any firmer views on renewal rates?

And then also, are the renewal rates consistent across all your Annuity Blades?

Are you seeing a large variance by the different type of Blade?

Thank you.

That's really quite similar.

Obviously, there's some variance, but it's quite similar.

We've seen that this quarter a slight increase in the renewal rates.

I wouldn't turn it into a metric here just because we need to see for a few quarters that it continues to go that route, but I'll remind you that we said it's around 60% renewal rates for the a la carte Blades and around 40% for the bundled Blades, which was very high.

When we launch a Software Blade, we expected the bundle to be renewed 10%, 15%.

I'll just remind you, when we say bundle, it means we sold them bundled together with their appliance and we assumed that in the second year, about 10% to 15% will come back to renew.

We were pleasantly surprised with around 40%.

And in the second year, we see renewals in higher rates.

This quarter, it's past the 60%, so it's a positive trend and we hope to continue to see increasing the renewal rates in the second and third year.

Terrific.

Thank you.

Shelby Seyrafi, FBN Securities.

Talking about product growth again, do you think mid-single digit product growth is possible going forward?

And also, as you shift more to software, your margins are higher there.

So could that produce even further operating margin expansion as that transition takes place?

And related to that as well, do you think GAiA is going to be a catalyst for additional sales starting this quarter to the Nokia customer base, IP base?

Thanks.

Okay.

These are three separate questions.

I'll try to address them.

First, I'll start at the end.

GAiA definitely has nice potential.

We do think that many customers are waiting for GAiA in order to move from the IP Series to the new appliance model.

So that's one indication we need to get.

That's the first one.

I think in terms of product growth, I think I mentioned in previous question, I think the current growth is nice, but I think we can also anticipate higher growth from the product line.

And I think overall, the growth of Software Blade is only positive.

Regarding the margin, we are not -- I think our margins are very high and definitely not trying to shoot for a [third] to manage the operating margin.

What we try to manage is run the business effectively and generate the most effective growth that we can.

So I mean, I'm not anticipating huge changes in the operating margin in the short-term, but we're also not trying to shoot for a certain margin or manage the margin into -- we try to grow the revenues and to grow the profits and the margin is the by-product.

The improvement in operating margin in the last three years moves up from 53% to close to 60% on average, so we understand that we've seen a great improvement in the margin and definitely one of the reasons there is the leverage in the business model and the fact that we sell many Software Blades.

So you're seeing the effect that and you're right in your intuition that Software Blades carry higher margins.

This is in software.

You've seen the effect already.

And in the end, what will happen to the total margin depends on the mix of the growth of the hardware, appliances versus Software Blades and software in general.

Okay.

What kind of tax rate should we use this year and next?

This year, I will keep the same.

It's around 20%, if I recall.

And the next year, probably it will start going down.

Probably 1%, maybe even 2%.

Okay, thanks.

Michael Turits, Raymond James.

Couple questions.

First, Gil, would you say you think it looks like product growth rate could accelerate?

What would be the drivers?

Why would it have been slower this quarter and how would that accelerate?

And then one other question.

Somebody pointed out that at least the calculated billings growth was a little down.

Could that by any chance be -- is there any function of people hesitating to buy ahead of GAiA or are they waiting ahead of that release?

I think we have many different drivers to the business.

This is definitely one of them.

No driver like that is major is going to make a huge shift in our sales in the future.

But as I said, there are customers waiting for GAiA, we know that.

There are -- we look at the entrance to the year.

We had an extremely strong end of fourth quarter, which means that the sales people started the year with almost an empty pipeline and still generated amazing results by any criteria.

I think when we go into the second quarter, we have a bigger pipeline and that should help in additional sale.

All of that is built into our model.

I think we are very, very much in line with our plans.

I think that's the main thing I can say.

I don't expect to hear any major changes, but within the small margins, I think we can expect both things.

Okay.

And then just one follow-up question.

On a revenue basis calculated off the percentages, it looks like Europe decelerated a little bit relative to its trend in the last couple of quarters in revenue growth rate.

Anything to observe there in terms of how Europe did as a geographic region?

Tal may help you more with calculation.

What we've seen in the last several quarters is that the US economy is strong and that's a very positive thing.

In Asia, we also see very nice growth.

But in Europe, it's varied, so I don't even want to look at Europe as one entity, because in Europe, we're seeing some countries that are growing extremely well, other countries that are growing differently.

Overall, Europe is behaving -- and that by which flips over to next quarter.

It's not that there are some countries for the last two years are growing faster and some that are not growing.

It changes quarter by quarter and the same phenomenon we saw last quarter, and I think our forecast for Europe for the next quarter are quite positive.

Okay.

Thanks, Gil.

Walter Pritchard, Citigroup.

Tal, question, follow-up question on the tax rate, or on the tax implications here with return of capital.

You guys had previously been down to about $200 million, or you've been buying back about $300 million the last couple of years.

Does that in theory completely go away, the restriction on buyback, or does that phase out over time?

In theory, it goes away immediately.

Okay, got it.

And then, Gil, any way of quantifying for us on the GAiA and Nokia install base?

You've had the product line, their product line now for about three years.

Any way to quantify how much install base is left or how many of your customers are still primarily putting in place the Nokia IP appliance still at this point in time?

I don't remember the exact percentage, but it turns out that the IP Series install base was much more loyal than we anticipated and by the way, that produced great results.

I'm only saying it on the positive side.

And I think we are seeing now a lot of the IP Series that are seeing the new appliance model that provides three times more price performance that wants to shift to our new product line and that's another good phenomena.

And I think many of them, some of them at least are waiting for GAiA.

So that's, so that's the positive thing that can happen.

As I said, I don't think -- we're not talking about huge jumps or big changes in the mix.

But I think we are starting to see the -- we've started seeing the last quarter the shift starting.

And that's after about three years when the IP Series sales were very stable.

Great.

Thanks a lot.

Just to clarify, doesn't mean that they didn't refresh in the past, but they probably refreshed to other IP products and not necessarily to the other products.

Philip Winslow, Credit Suisse.

Good quarter.

Just got a question on the Blade strategy.

Obviously, Gil, you mentioned the Anti-Bot Blades, just curious how you gauge your expectations for that Blade versus some of your recent introductions.

And also, just in particular with the Blades, obviously the Application Control Blade has gotten a lot of focus here.

Wonder if you can give us an update on that and also what you're seeing competitively versus some of the other folks out there.

Thanks.

I think the Application Control Blade is doing very well.

The IPS Blade is also doing very well.

I'm very much in the dark as to the Anti-Bot product, I think it's completely new type of Blade.

And our history shows that most of these Blades, it took them some time to ramp up and they ramped up quite nicely.

The only way we ramped up things quickly was we bundle these Blades with existing appliances.

At the moment we haven't bundled the Anti-Bot Blades with any models, so it's not bundled, it's sold a la carte.

Based on the surveys and based on the demands of the marketplace, we may consider to bundle it, but right now, the Anti-Bot Blade is only offered a la carte and especially given the subscription model that it has, I'm not expecting in the next, I don't know, six to nine months, any substantial difference to the number based on that.

But I think long-term, it has a huge potential.

I think everything I discussed on the ThreatCloud is very well demonstrated by the Anti-Bot and that's pretty big delay, I think.

And then just competitively, curious what you guys are seeing out there.

Not too much.

I must say that the last quarter or so wasn't -- I think our market is always competitive, so I would hate to see that it became less competitive.

It's very competitive, but we've seen less pressure on that.

I think that with the two large competitors that we have, we're seeing and we have a lot of evidence from research data and show ones that are weakening while we are getting stronger.

There are two smaller Blades that are doing quite well and at least the only thing I can say within the last quarter or so we've seen that competitive pressure slightly weakening, not strengthening.

Great.

Thanks, guys.

(Operator Instructions)

Phil Rueppel, Wells Fargo Securities.

Could you kind of clarify a little bit for us, how you see the financial impact of GAiA, do you expect existing Nokia IP customers to just upgrade or do you think they will buy a refresh of the whole appliance?

Then as far as ThreatCloud goes, is that just really an integral part of GAiA or are you going to market that as an annuity, or is it really just a platform that would hopefully drive larger adoption of Blades going forward?

Thanks.

So I think ThreatCloud will be an integral part of the R75.40 start of the Anti-Bot, start of the new Antivirus, it's part of the URL Filtering and I think we want it to be an integral part of our network.

And right now, we are not considering any special pricing changes.

Based on that in the future, we'll see how adoption is going on and we'll consider different economic option as well.

But right now, it's bundled with the Software Blades pricing and what we expect is simply that customers that buy more Software Blades will see the benefit of participating in that collaborative network.

Great, thanks.

And GAiA.

And the GAiA effects, again, customers can upgrade.

GAiA will run on all the old appliances that we have, including the IP Series.

So customers are free to upgrade.

I do expect that many customers that have been refreshing their appliances will now refresh to the new Check Point series of appliances and I think very easily it will be pent-up demand for that in the marketplace.

Great.

Thanks very much.

Greg Dunham, Goldman Sachs.

I just have one follow-up on kind of the IPSO hold-up dynamic.

Is there any way you could give us a sense of how weak the IPSO install base was in purchasing in Q1?

Any way to quantify that?

Is it $2 million, or is it something more significant than that?

And the follow-up would be, I know you guys haven't had a release like this in many years, but how should we think about the ramp-up in terms of upgrades from that install base going forward?

Thanks.

I think first the IPSO install base was very strong for many, many years and I can't say what was the situation exactly in Q1, because in Q1, we had a total shift of all of our product lines.

In the last -- in Q4 we announced the new appliances and we started seeing all the sales moving to the new appliances, so I don't know if something is particular to this model or this model of appliances.

What I think I mentioned and I'm saying that we are starting to see the shift from the IP Series install base that was relatively loyal in both themes within the same line to the general product, product line and that's very, very positive because the general product appliance line is more competitive, offers more power, from an investor standpoint, we get higher margins on that.

I mean, it's very positive that customers will move to a product that provides them better value and us better value.

Thank you.

Brent Thill, UBS.

Gil, I think we're all trying to reconcile a 5% license, or product revenue growth rate, which massively decelerated.

Obviously, you had tough comps, but given your comment about a less competitive environment, that would only point to internal execution issues then for Q1 on product.

Is that a fair outcome?

Because that's the only thing we could point back to for that type of deceleration.

I think -- one point, that you may be missing the investment point about the Software Blades.

The Software Blades are part of the product, of the product price.

Just accounting wise, they fall into a different line.

And I think there are a few points of software Blades that are moving from the product line to the subscription line.

And that's something that can -- so if you overall take seasonality plus few points moving from -- when I sold this part of the product, when the customer is paying $20,000 for an appliance, they pay for a single product.

Accounting wise, $5,000, $6,000 of that moved from the products line to the subscription line as Software Blade and that rate has grown in the last few years.

It's grown consistently because we kept adding more Blades to the product.

I can just remind you that in proportion now, the Software Blade out of the product is more than 10%.

The part that is being separated from the appliance value is not 2% or 3% or 4%.

It's more than 10%.

So it's quite significant and therefore, that portion is going from the product to the deferred and then to the service line.

Without giving any numbers, if you take 2, 3 points that are the shift from product to Blade and 2, 3, that are the seasonal effect of Q1, you would actually see that if we normalize that, I think our run rate is pretty healthy and we hope it will continue this way.

Now, again, if this a lighter Q2, it can improve.

And the comp to quarters will also change, because in previous years, we also kept adding Blades.

So I think that's a thing that can change in the next few quarters.

Thanks for clarifying.

But I just want to be clear, the number of gateways we sold this quarter was very healthy.

All of the other indicators that I have internally are very nice.

Jonathan Ho, William Blair.

Just a quick follow-up in terms of the products at the high end of the market.

Can you guys talk a little bit about your pipeline build there and how significant a part of (inaudible) this can be exiting the year, concerning that you guys doubled that on a quarter-over-quarter basis in some lines?

First, it's built up quite nicely and we have a nice pipeline of large -- the 61000 so on deal.

I should still be careful about that, because that's concentrated on small number of large deals.

Small number of large deals can easily shift from one quarter to another.

It can easily move between them.

But so far, the momentum there is very positive.

We've built a very nice product line in two or three quarters, but again, doubling every quarter and again, it's very hard for me.

And the pipeline is nice.

It's hard for me to predict when these growth rates will start to balance, to get in line with the rest of the business or how long it can grow in the rates like that.

But the pipeline is there and the opportunities are there and seems to be very much in line with what we planned when we started with this higher product.

Got it.

And just in terms of your updated view between the product and subscription revenue percentages, how should we think about that on a longer-term basis given that you're seeing that faster uptake on the subscription line?

What do you see that eventual mix kind of falling out to even as you add these new I guess recurring components?

I think you can see that the service portion is slightly more than 60%, including the subscription.

So I don't expect it to move quickly to the 70%s, but I think we are pretty much where it should be right now.

And let's not forget that it's very, very positive because products are seasonal, and products have ups and downs, the subscriptions are much more stable and that's why we made the shift to Software Blades.

We could've easily taken the same Blades that we have today and tried them on a fixed-price basis and charged them one time and recognize it one time.

I think what we're building here is for the long-term model, and I think it's a very good long-term model.

Got it.

Thank you.

Gregg Moskowitz, Cowen and Company.

Okay, just a follow-up on the previous question.

Gil, the 61000 is off to a very good start, and last quarter I believe that you expect sales of the 61000 to reach the tens of millions by Q2 or Q3.

And I understand there is some uncertainty around large deals, but is that still how you're thinking about the trajectory of that appliance line?

Yes, I think we're pretty much there.

Okay.

Great.

Then just a quick follow-up, and a quick housekeeping.

Roughly what percentage of customers are on R70 and R75?

Thanks.

Probably around half.

50%.

Remember we said it would take around five to six years, we launched it in mid 2009.

So it's around three years, slightly less than three years.

And we are around 50%.

And again, I just want to be clear, all the new customers and all the new installations and updates are now R75.

I know in the past when I've mentioned to customers we always challenge what about the new features, I'm still on the old version today, all my meetings with customers there wasn't the issue.

All of them were R75 and so on.

So while we are talking about customers deploying new things, that's not an issue.

Everybody's deploying the new version and that's great actually.

Okay.

Great.

And if I could just ask one last one.

In the previous quarter, I think on a couple of occasions you guys had singled out or talked about premium support being quite strong end of Q4, and I realize there's some seasonal aspects but how has premium support sales as a percentage of total support this quarter versus what you guys saw a quarter or two ago.

Thank you.

It's kept at the same rate, so it's pretty good.

Remember that also if you are already bringing that issue up, in Q4 we also had a lot of professional booking, professional service booking, which are typically the highest in Q4.

So that's part of the higher growth rate that you see in Q4 versus the other quarters.

Q4 you have a nice portion that's coming from professional services to customers.

Okay.

Thank you.

Dan Cummins, ThinkEquity.

Could you give us some idea of how well you think you performed in the service provider and the managed services business in Q1.

And I'm curious if ThreatCloud will work when customers are using a managed outsourced provider.

Thanks.

First, ThreatCloud will work in any environment, I've found discussions with some telcos that are interested in offering ThreatCloud with the services they provide and we by the way are fully ready to provide ThreatCloud not only as a big service from Check Point but also as a private service from whoever wants to build such a network.

Beyond that, I think the service provider market was fine, I think there's still a lot of potential ahead with this market, and there's a lot deals that are still waiting inside this market, I don't want to set any expectations for this market but it has a lot of upside.

Keith Weiss, Morgan Stanley.

I believe last quarter where we passed probably 10% contribution from the Blade revenues or billings.

Is there any chance that we'll get more granularity or color on how big the Blade contribution is?

Any chance we could get a target on where you think that goes in terms of revenues or billings for 2012?

Last quarter it was more -- I think you were talking specifically as a portion outside out of the total revenues, is that correct?

Yes.

So if it's continuing to increase naturally since our Software Blade business is increasing, I remind you that we reached a run rate of more than $200 million in Q4 2011, for the annual 2011 Q4 times four.

And Software Blades continue to grow rapidly, there growth is much higher than you see in our revenue growth, or even booking growth that we try to calculate.

Significantly more, it's not 10%, it's not 20%, it's not even 30%, it's more.

So it's a very nice Software Blade, this continues to grow.

Naturally over time you will see that growth rate growing to more a normal level.

But we are having new Blades that hopefully will continue to keep the momentum of the Software Blade growth.

So it's continued to grow significantly as part of the booking and as part of the revenue as a result.

Got it.

And perhaps one follow-up on margins or investment versus growth.

You guys have come out with a lot of new product over the past let's call it six months, you have a whole new appliance line, you have the new Unified Platform with GAiA, you have the new ThreatCloud out there, when you guys look into 2012, should we be thinking about any changes in the way you guys look at investment versus growth?

If we look over the past two quarters I think sales and marketing, and granted US dollar had some impact on that, growth was just around 5%.

Is there any chance of that ramping up in terms of more sales support and more marketing support around all these new products?

Or should we be thinking about investment generally in line with what you guys have done in the past?

First, I think we'd like to invest more.

In terms of sales and marketing expenses, it's composed of very different items and some of it for example is seasonality marketing activities.

In Q2 for example we have a lot of marketing activities like I mentioned the Check Point Experience Conference that we just had in Orlando, there's another Check Point Experience in Berlin in a month.

And by the way, Q4 and Q1 is the opposite; Q4 people are busy closing the pipeline for the year, and in Q1 they're starting to build the pipeline.

Q2 is the stronger one in terms of most marketing activities.

A little bit also in Q3 we have a lot of Asian conferences and things like that in Q3.

But overall we would very much like to invest, I think we want to keep the business as effective and efficient but I'm thinking all of our discussion about operating margin, we said our focus is how to invest and grow effectively rather than how to shoot for a certain margin number.

Got it.

And if I could sneak in one last one.

Did you guys give a headcount number for the end of the quarter?

We did give it, it's approximately 2,500 people at the end of the quarter.

Excellent, thank you guys.

Mr.

Meintzer, we have come to the end of our allotted time for Q&A.

I'd like to turn the floor back over to you for any closing comments.

I'd just like to say thank you for everybody joining us and we look forward to seeing you throughout the quarter.

Have a great day and we'll talk to you soon.

Bye bye.

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