Check Point Software Technologies Ltd (CHKP) 2012 Q2 法說會逐字稿

Greetings, and welcome to the Check Point Software second-quarter 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 Technologies.

Thank you, Mr. Meintzer, you may now begin.

Thank you, and good morning and good afternoon to everyone.

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

Joining me on the call today are Gil Shwed, Chairman, Founder, 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 July 25.

If you'd 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'd 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 our demands for our security products, our taxes in Israel, our share repurchase program, the introduction of new products and programs, and the success of those products and programs, and our expectations regarding our business and financial outlook for the third quarter of 2012 and the full year.

Other statements, which may be made in response to questions, which refer to our beliefs, plans, expectations, or intentions, are also forward-looking statements for purposes of the Safe Harbor provided by Section 27-A of the Securities Exchange 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 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 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 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 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 second quarter of 2012.

Our revenues for the quarter increased by 9% year-over-year, and in line with our guidance.

Non-GAAP EPS was $0.77, representing 13% growth, and was towards the high end of our projections.

Before I proceed further into the numbers, let me remind you that our second-quarter GAAP financial results include non-cash equity-based compensation charges, amortization of acquired intangible assets, and the 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 second quarter, revenues reached $328.6 million, representing an increase of 9%, compared to $300.6 million in the second quarter of 2011.

This growth was driven by continued strength in our software updates, maintenance and services revenues.

These revenues reached an all-time high of $205.5 million, with an outstanding growth of 13% year-over-year.

The growth was driven by our annuity software blades, that are recognized as subscriptions.

We continue to see great success in all blades, led by IPS, application control, and URL filtering.

Product and license revenues were $123.2 million, representing a 3% increase over the same period last year.

In October last year, we introduced our new appliance line, increasing our performance significantly, and improving our competitive position.

As a result, since the beginning of the year, we experienced an outstanding growth of over 20% in our enterprise gateways.

At the same time, this growth is partially offset by customers opting to purchase slightly lower-end models as a result of increased performance on the one hand, and current macroeconomic environment on the other hand.

Many local currencies around the world weakened against the dollar, adding pressure to pricing as our worldwide price list is in US dollars.

Deferred revenues as of June 30, 2012 were $536.6 million, an increase of $79.6 million or 17% over June 30, 2011.

With growth in revenues across all geographies, revenue distribution by geography for the quarter was as follows.

Americas contributed 44% of revenues, Europe was 39%, and Asia-Pacific and Japan, Middle East and Africa region contributed the remaining 17%.

From a deal size and quantity perspective, this quarter we continued to see an increasing number of larger deals.

We had 40 customers that each had transactions with a value greater than $1 million, compared to 37 in the same period last year.

Transactions greater than $50,000 accounted for 66% of total order value, compared to 61% in the same period a year ago.

From an operating perspective, we posted great results.

Our GAAP operating income was $180.5 million in the second quarter of 2012, an increase of 20% compared to the same period in 2011.

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

Our non-GAAP operating margin this quarter reached 59%, representing an increase of 2 points compared to the same period last year.

It was achieved primarily as a result of the tailwinds from the strengthening of the dollar against other currencies, compared to the same period last year.

GAAP net income for the second quarter of 2012 increased by 17% year-over-year, from $128 million or $0.60 per diluted share, to $150 million or $0.71 per diluted share.

Non-GAAP net income for the quarter was $161.8 million, or $0.77 per diluted share, up from $145.5 million or $0.68 per diluted share in the same period a year ago.

Earnings per share was towards the high end of our guidance, representing 13% growth year-over-year.

Cash from operations this quarter were $157.5 million.

Collections continued to be strong, with our DSO at 69 days, a decrease of three days compared to last quarter.

As discussed in previous quarters, the new tax reform in Israel came into effect this year.

The reform simplifies the tax structure, reduces many tax uncertainties, and lifts the tax limitation on cash distributions from future income.

As a result of the reform, there is an $11 million increase in tax payments, while the effective tax rate in our P&L remains the same as expected.

Both cash payments and P&L tax rates are expected to reduce slightly next year.

We hedge our balance sheet against major currency fluctuations.

During the quarter, the dollar strengthened against most currencies in the world, resulting in a negative impact of approximately $16 million on the cash flow, with no effect on our P&L is expected.

Excluding these effects, the operating cash flow increased by 13% year-over-year.

During the quarter, we repurchased approximately 1.4 million shares, for a total cost of $75 million.

Finally, our cash balances reached $3.202 billion.

As we believe in our long-term growth, and the future success of our new and innovative product family, we have announced today the decision to increase our share repurchase program and assign $1 billion pool, that is available for repurchases over the next two years.

Let's turn the call over to Gil for his thoughts on the second 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 be with you on the call today and share some more information.

In the second quarter we produced decent results, beating our EPS, and coming in line with our revenue projections.

Let me address some of our successes, as well as some of our challenges.

Geographically, the US continued to show very good results.

In Europe, we've been able to win large projects and deliver significantly more units overall, while the economy put some pressure on pricing, with local currency weakness against the dollar contributing as well.

We've seen a different pattern in different countries in Europe, some of them demonstrating healthy growth like Germany, France, and Italy this quarter, along with several other northern countries, while some other countries are not performing as well.

Sales of our software blades continue to post very nice growth.

[In other words], software blades revenues are recognized as an annuity, and are amortized, and we include many software blade bundles for the first year with our new appliances.

We believe that customers with experience using them will renew them next year.

Indeed, our a-la-carte blades revenues, including the ones being renewed after the first year, are showing very nice growth with about 60% year-over-year growth, which is mostly reflected in our deferred revenues and services line.

The rest of our services are also growing nicely.

Our product line growth rate this year showed only a slight decrease over last year.

Diving into these numbers shows a more interesting story.

About 80% of our product revenues these days are derived from our enterprise appliances.

At the end of 2011, we launched an entirely new line of appliances, which increased our performance by roughly 3X.

In the past two quarters, these appliances have become a huge success, and have increased our competitiveness in the market.

Actually, this quarter we sold over 20% of enterprise appliances from a year ago.

However, as a result of increased performance of our new appliances, and the current macroeconomic environment, customers are opting to purchase slightly lower-end models than previously.

While we intend to sell more units and achieve higher revenues, the current scenario has some positive undertones.

First, winning more projects and increasing our share within customers is a very important sign.

Second, continuing to win new customers is another important business metric.

Finally, each such new appliance creates a great opportunity for future renewal of the Software Blades bundled with it, and future hardware refreshes.

So, the result is increasing our market share and increasing our future potential growth.

Finally, our high-end models are continuing to show good results, and has a nice pipeline.

This included a 61,000 series super high-end security system, as well as our new security accelerator module, which was just introduced, which many customers have been waiting for.

It's an exciting product that produces amazing low latency performance for data center and mission-critical environments.

But the appliances are only the delivery mechanism for security technology.

In this quarter, we continued to aggressively deliver more security technology to our customers.

The ThreatCloud security initiative was launched early in the quarter, and experienced great adoption during its first quarter of availability.

We launched a new solution to combine denial of service attacks, the DDoS protector, which further expanded our market opportunity.

When I talk to customers these days about Check Point's market position, I get very good feedback.

Customers are very excited about the expansion of our vision, and the completeness of our architecture.

In the past few years, we've been able to deliver many new software blades addressing new security threats and even gaining leadership in some key markets.

For example, we believe the Check Point today is the most widely used IPS and application control solution in the marketplace, with approximately 100,000 gateways with IPS, and close to 40,000 gateways in application control.

When speaking to customers, they mention our ability to consolidate marketable security solutions, and provide security management capabilities years ahead of the rest of the market.

Our solutions today not only deliver the most secure firewall, but also give the most accurate and detailed application control, combat the most sophisticated attacks, such as [both], and deliver advanced technologies like DLP or data leak prevention.

And these are all available in each Gateway, all while using the unified architecture.

Recently, our customer surveys also showed that customers like the range of platforms in which we can get our solutions, from the very low end to the industry's fastest solutions -- all new models with great performance.

As we look forward, we have many new products and technologies that can deliver great results moving forward.

I hope with our current market share increases, our increasing investment, and maybe with some help from the economy, we will be able to translate these advances into even stronger results.

Please keep in mind that due to the uncertainties around the economy, and risks in the marketplace, specifically as we go into first quarter which is always a challenging quarter, these will be reflected in a wider range for our forecast.

With that, I'd like to share our projection for the next quarter.

For the third quarter, we expect revenues in the range of $316 million to $345 million.

Non-GAAP earnings per share in the range of $0.74 to $0.81 per share.

GAAP EPS is expected to be approximately $0.07 [less].

Finally, as you probably have seen today, we have decided to increase our share repurchase program, and have assigned a $1 billion pool for this program.

We believe that our market leadership and long-term growth prospects make this an effective time to further utilize our cash to increase shareholder value.

With that, I'd like to thank you once again for joining us on the call today, and open the call for your insightful questions.

Thank you.

(Operator Instructions)

Thank you.

Our first question is from the line of Rick Sherlund of Nomura Securities.

Please proceed with your question.

First, on competition, Palo Alto is out in the market talking a lot about the need for everyone else to re-architect.

I wonder if you could just address that issue, and to what degree have you seen greater competition in the market as a result of their entry?

First, our market has been competitive and remains competitive, so I don't think that changes anything significant in the marketplace.

I don't, specifically I don't really get that they need to re-architect.

I think Check Point has for the last two or three years, an amazing new architecture for security solutions, the Software Blades.

I think that customers that find it the best architecture, it's a multi-layered approach, it's a very modular approach, so, each customer can run and pay and get the performance for exactly what they want.

And it's very flexible in terms of the hardware architectures and the hardware models it can run on.

So, I think overall, Check Point today has the best architecture, the best management capabilities.

And I think we are hearing a lot of good feedback on that from customers on one hand and from the many testing labs and other environments as we see.

And on the competition side, are you starting to -- is the competition getting tougher or -- some VARs I talk to say -- well, it was tougher a year ago, but you've responded in the channel, you're doing more channel promotions and things now, and you're responding better.

Is the competition getting worse, or are you seeing it lessen a little bit?

I think it remains similar.

Every year we have new competitors.

Every couple of years there's some competitors that generate a lot of headlines.

I think we're never resting on our laurels today, but our main focus is on what we can do to advance security, and to do for the customers, and to advance technology for the customers, and that's what we've been doing for a very long time.

And in that long time, I think we went through -- and I think you've seen that, for like four different generations of competitors that came by, had a couple of good years and kind of, I don't know if disappears, but winded down or got acquired and winded down with the company it got acquired with.

So, I think we'll continue to work hard.

We'll continue to generate -- to deliver more solutions, more technologies and so on.

And I think that's our answer to that.

So, I hope -- I'm glad with the answer that you are hearing about our advance in technology compared to Palo Alto and others.

Thank you.

Our next question is from the line of Michael Turits of Raymond James.

Please proceed with your question.

On the buyback, you announced that the increase in authorization of $1 billion, for the change in the tax structure, any reason to expect you might be more aggressive on that front, particularly when the stock is at this level?

And also just rough expectations for the actual tax rate going forward?

First, [the tax results] from the beginning of the year, obviously helps the fact that we can distribute much significantly higher amount if we choose so.

Our Board takes into account the growth opportunity of Check Point in the long run, and our strong product and success in the market, and thinks it is an opportune time to do so.

We approved the $1 billion.

Of up to two years, we can be flexible, and it's not going to be necessarily in a straight line method.

We can do based on market conditions, and our expectation be flexible in the acquisition.

If we would like in the future to change it, we are always free to do so.

And then, any impact from the deployment of the GAiA operating system?

I can't recall if that's actually out and being distributed, but at 64 bit, should be helpful to performance.

Any impact in terms of acceptance and purchases of appliances?

So, we've got pretty good feedback on the initial acceptance in GAiA.

We've seen, the recent release that has GAiA in it, R75.40 has significantly more interest than previous versions.

We measure, for example, the customers that installed that version or downloaded that version -- 60%, 70% higher than previous versions for the same period of time, so the interest level is high.

The 64 bit is also a very good advance.

Keep in mind, by the way, 64 bit doesn't necessarily increase performance.

It does increase capacity.

So, it allows systems to get many more connections and bigger capacities of performance.

So, in some areas, it has higher performance, and in some areas it may have even lower performance.

But overall, the reaction is very, very positive, and we get a lot of interest.

And I think in a few months we'll see how successful it is when the large customers are going to really start to deploy it in large installations.

Okay.

Great.

Thanks.

Our next question is coming from the line of Brad Zelnick of Macquarie.

Please proceed with your question.

I just wanted to talk about the guidance a little bit.

The revenue guidance that you gave us seems to be a bit lighter than your typical seasonality.

I was wondering how much of that is for movements in FX and resulting pricing pressure, versus conservatism around the environment?

And also, on the full-year guide, does your full-year guidance for 8% to 12% top line growth and $3.10 to $3.20 in non-GAAP EPS still hold?

I think for this quarter, again, the level of uncertainty around the economy is high, and especially when we look at [first] quarter, which tends to be slower in activities, especially when you look at the weakness it concentrates around Europe, when everybody's going on vacation now.

And everybody by the way also is focusing on the full-year budget and the full-year project, so Q3 has always, and I say it every year, a higher level of uncertainties, given the economic environment which has threatened it.

I think that there's also a lot of good things that can happen both in Q3 and Q4, and there's a lot of large projects that we work on.

But in order to accommodate both upside and risks involved, I decided to expand the range, rather than to change necessarily the specific targets that we have.

And for the year, again, we are not right now reopening our target, I think we'll see at the end of Q3, again, we may have very good news, and we may see a market that's not so good, and I think that both options are open.

As I said, there's a lot of good things happening in our markets, and there is also a lot of challenges deriving from that.

Finally, you asked about the impact of currency and so on.

There is multiple impacts of the currency.

One positive is that our expenses are down due to the strength of the dollar, so, all of the expenses that we have outside the US are showing lower in terms of dollars.

The big impact is the fact with our customers, in many markets, Europe is one of them, but also in Asia, their buying power now is lower because of the dollar; our products are priced in dollars.

And not only that their buying power is lower, but the reason that the dollar is threatening or their currencies are weakening is because their economies are not very strong, which means that, in many cases, these customers are not increasing their budgets, and maybe even cutting their budgets.

So, you take the double effect of the local currency that, let's say, weakened, take the euro almost by 15% in the last year, and plus budget with our local currencies that are going down or staying stable, that has a big effect on their buying power, and it shows.

The good news for us is that we have today amazing performance in our new appliances, and we've seen that in Europe last quarter with customers actually purchased more units, got higher performance, but unfortunately for us at least, they purchased slightly lower-end models than they used to purchase before.

For the future, it has a lot of good things.

And a year from now when they renew their subscriptions and their Software Blade, we'll have more units that will renew.

When they continue to need more performance, we'll refresh even more appliances.

So, there's a lot of good signs for the future, but right now, clearly we see that in a big parts of the world, their purchasing power has been decreased, and that has an effect.

Again, it's speculation to say that if these currencies were stronger, would we have seen 3% more revenues or 20% more revenues?

It would be a speculation.

But clearly the economic data is showing a lot of that.

Thanks, Gil.

Just so I'm clear and everybody's clear, did you say that your full-year guidance at this point still stands?

And you still believe that you can achieve those targets that you initially set out?

I think that we have a good range.

And I think we still believe in that range, yes.

Thank you very much.

Thank you.

Our next question is from Brent Thill of UBS.

Please state your question.

Gil, just on the product side -- I think last quarter you mentioned you expected a re-acceleration.

We saw a deceleration, and it's obviously explainable with what's going on with the macro.

But can you just maybe help us walk through how you're thinking about the back half of the year, specifically on the product side, recognizing that you're seeing a shift to annuity blades and that's going to continue to help the deferred revenue?

If I look at the second half of the year, we have a very nice pipeline.

We have many good projects, we have a lot of good prospects, and on the flip side we have the economy and so on.

So, for the third quarter, I'd be a little bit more conservative, and personally I tend to be rather optimistic on the fourth quarter, given what I know, and given the marketplace.

As I said, there are some good signs.

For example, you look at the 20%, or it's more than 20%.

I said 20% but it's actually much more than 20% increase in the number of gateway units that we sold this quarter.

That shows that customers want more security.

And that shows that we have the competitive value.

And that's not, by the way, a price pressure, because we didn't give significantly more discount, or more discount in general.

The customers before purchased a $40,000 appliance for example, and today they want another one.

Today, they can get the same performance from us for, let's say, a little bit more than $10,000.

And if they want 50% more performance, they can get it at $20,000-some.

And if they want, and if they pay the same $40,000, they'll get 3 times more performance.

And what we've seen and what customers have done with that, is they've purchased the $25,000 model, and actually purchased almost two of them for the same price, in many cases.

So, I mean, customers have actually used the product competitiveness that we have to purchase even more units, and I think for the future it's a good sign.

Thank you.

Thank you.

Our next question is coming from Shaul Eyal of Oppenheimer.

Please proceed with your question.

Tal, a quick question for you.

You mentioned before the application control, the URL filtering, and the IPS as being the leading blades.

Is that basically the way that you are ranking internally the sales of those blades, internally at Check Point?

I don't know what you mean, ranking the sales, but it's basically if I look at the dollar value of each of the blades, these are the top three.

When we look at the growth rate, they all have very healthy growth rate.

We actually are seeing a very nice growth rate in the URL filtering and anti-spam, and anti-bot started very nicely, and it just has been launched, so it's quite interesting.

In terms of dollar value, IPS, application control, and URL are the top ones.

In that order.

Got it.

Thank you for this clarification.

And, Gil, you mentioned a little bit about Europe, Germany, France, Italy for [a change], doing a little better.

What about the situation in the UK?

And that could be helpful if you can address that.

I would actually rather not get into too many countries example.

And actually what we've seen in Europe and maybe I quoted these countries to show that every quarter we see different pattern in different countries.

One quarter, the UK will be strong, another quarter France will be strong, and so actually France has been weak for us for several quarters and now is becoming stronger.

Italy has been weak for us for a long time, now it's actually -- I think it's maybe the second quarter in a row that it's becoming very strong.

So, there are many different examples.

And I think treating Europe as one is always challenging, because there are many countries and many economies within Europe.

And the interesting thing is that, at least at the moment, we vary between quarter to another.

There's no one country that I can say -- this is like the second year in a row in a good situation, or even in a bad situation.

It really varies from quarter-to-quarter.

Got it.

And if I may squeeze just final question, with respect to product revenue on the third quarter, how should we be thinking about it?

Flat, a little up sequentially?

I think if you look at history, you will see sometimes it's up, sometimes it's down.

It really depends, taking into effect also the range that we provided, I think both can happen.

Thank you very much.

Thank you.

Our next question comes from the line of Gregg Moskowitz of Cowen and Company.

Please proceed with your question.

Gil and Tal, you both mentioned earlier that customers are opting to purchase slightly lower-end models as a result of the increased performance and also the macro environment.

But I'm wondering if you can maybe help me reconcile the fact that gateway appliance units did grow by 20% year-over-year.

Whereas product revenues grew by 3%, and bookings grew by 9%.

And Gil, you mentioned that example recently in response to Brent's question about how a customer can buy a $20,000 appliance with 50% more performance than the old $40,000 appliance.

And I'm just wondering -- is this just a slight product mix shift?

And going forward, is this going to be something for all the benefits that customers actually receive that will constrain your growth in that respect?

I think, again, it's a reflection of the better performance that we have, and it's slightly a reflection of the economy, but let me give you a simple example.

If, in the past, the customer purchased a Power-1 5070, that costs $42,000, and has a roll performance of 9 gigabits per second.

Today, they can purchase something that's almost 3 times as fast for $45,000, the 12400 model for 25 gigabit for $45,000, that delivers 25 gigabits, almost 3 times as fast.

And in a good economy, that's what we will do.

We'll spend 10% more, and get 3 times more performance.

If you're a little bit more conservative, they can get 60% more performance with the 12200 model that we launched.

This is the new model that cost only $29,000 and delivers 15 gigabits.

We can buy the 4800 for $21,000 and get 20% more performance, which they got before at $11,000, and they can even go as low as to the 4600 and get the same 9 gigabits that they got before at 0.25 of the price.

So, what we've seen is, customers have taken -- if we look at the change in product mix, what model they purchase, is that most customers in that case or the average behavior was to take the 60% more performance at 20% less price.

Which is not an unreasonable behavior for customers, especially given the economy.

Again, that would be maybe an average.

In reality we are seeing sales of all the product, there are nice sales of the high-end product.

Actually the super high-end product, the 61000, there wasn't a comparable a year ago, which is actually doing quite well, and it has a big pipeline, and we are winning more and more with deals actually in sectors that we didn't even seem to win them.

Commercial sector and so on, not just in the telco sector.

And this is generally the behavior of our entire product line.

And I think you can understand why.

Now, the good news is that we buy more units.

Because if we would just buy more performance at a lower price, we would buy more units, and we would see a different behavior.

So, the good news is that we were able to grow revenue on the appliances.

And on very specific appliances, even grow revenues nicely, and that's a good sign that shows the competitiveness and the market share gain.

Okay.

Thanks, Gil.

Thank you.

Our next question is from Daniel Ives with FBR Capital Markets.

Please proceed with your question.

Could you just go through the quarter, even month-by-month in terms of changes you saw in the customer base or deal flow?

Just so we can understand how the quarter -- the trajectory was, and maybe what you've seen over the last few weeks?

I think the quarter remained pretty back-end loaded, like we've seen in previous quarters.

Our quarters are staying or becoming even more back-end loaded to some extent.

This is, by the way, partially a reflection of the fact that we're winning larger and larger deals.

And I think Tal gave some statistics about winning more large deals.

And unfortunately in our industry, people close large deals at the tail end of the quarter, so we are seeing the quarter back-end loaded.

In terms of how the quarter behaves, I think our sales force has some forecast within the quarter, and I think they came within a reasonable range.

So, that forecast didn't change significantly during the quarter.

There were changes, we weren't exactly where we are, but very normal in every quarter.

So, it's not that we started with low and got high, or that we started with a high forecast and finished with a low one.

Actually, the sales force kept its forecast for all the quarter, and achieved pretty reasonable results for that.

Okay.

Could you just talk about, in terms of discounting?

Toward the end of the quarter, was there anything unusual this quarter versus what you've seen historically?

Not really, actually.

Discount rates remain pretty much within the same lines.

In Europe, there may have been a slight like 1 or 2 or 3 points more discount, nothing major.

But the only exception would be maybe Europe because, again, 2, 3 points more discount on the average.

At the end of the quarter, we don't necessarily give larger discounts and so on.

It's not that customers should wait for the last day.

Actually, customers that wait for the last day to get the discount is less likely to get it because there's so much load that we've cut off days, and we have a good process of approving it and reviewing it and so on.

So, it's more of the build up of the deals.

And deals, again, when the sales force works with them, they target everything to close before the end of the quarter, and that's what we do.

Okay.

One final one -- in terms of the cash situation, obviously you have enough cash to buy a small country.

You got the buyback, you have some in M&A.

Speak to your thoughts, obviously represent the Board, in terms of initiating a dividend?

Thanks.

I think we are reviewing all the options every quarter.

And you see that.

And you're seeing that this time with, decided to increase the buyback.

I think first buyback share is in the biggest -- let's say three elements to the buyback.

One is the prospect growth that we see moving forward.

The second is the use of the cash if we have better alternatives for cash usage.

And third is the shareholder interest or the shareholder feedback that we get.

And I think all three elements point to the fact that the share buyback is the right decision.

I think that it's a very good use of the cash given the interest rates today, and given that we have enough money to fund deals and acquisitions if we want to.

And I think we believe in the prospect growth, so now we can make it a good time to do that.

And I think we are conducting once in a while some informal surveys among shareholders, and checking what the shareholder preference -- what you guys are thinking.

And generally speaking, or not generally speaking, every time we did that, we saw huge preference to a stock buyback, dividend, [over than] doing nothing with it.

Clearly I think share buyback, I think more like 70% or 80% of the growth.

So, that's what the Board is considering, and that's the Board decision.

Personally I'm not against dividend, so, there's no biases here, and we'll continue to consider the right option as we move forward.

Thanks.

Thank you.

Our next question is from the line of Israel Hernandez of MKM Partners.

Please proceed with your question.

Good morning or good afternoon, guys.

Just a question on the performance of the Americas.

By my calculation, it looks like it was a bit lighter than my expectations.

So, just talk about what you saw in the Americas, particularly in the US.

Is there anything that impacted growth in the quarter?

Anything you could add there would be great.

Particularly around [wider] deals?

Thanks.

US actually, I could summarize it in one word, it was actually great.

The US continuing like double-digit growth, for I think it's now almost the third year.

And maybe even slightly more.

The market is performing well.

I think almost all the regions in the US did well this quarter, so the US itself is actually showing very good economic strength for a few years now.

Great.

Thank you.

Our next question is from Jonathan Ruykhaver with Stephens, Incorporated.

Please state your question.

I'm wondering if you can give us a sense of the size of the IP series install base.

I'm just trying to get a feel for the monetization opportunity as a result of GAiA, and the potential for hardware conversion.

And then also as a follow-up question, just how meaningful has that conversion activity been to-date?

Doesn't seem like you've seen too much yet?

The install base is -- in tens of thousands.

It's quite a large install base.

But historically, either some of them moved from the IP series to the new product, and some of them continued to refresh over the years from a lower IP to a higher IP series.

So, it's not necessarily means that they didn't refresh for five years.

When they needed to refresh, some of them moved higher in the IP series, and some of them moved to another product line.

Right now, the active IP is tens of thousands of units.

(multiple speakers)

IP is tens of thousands, but I would just say that we are starting to see the shift in the last two or three quarters.

For a long time, we've seen a pretty stable stable of IP series appliances.

The last six months we've seen a nice shift towards the other models that we have, and I think the big catalyst would be the GAiA new operation success that would allow seamless transfer of the environment that people developed over the years with the IP series.

And I think GAiA started last quarter.

Keep in mind that the customers with the IP series tends to be the slowest customers to move, or the customers with the most complex environments and more conservative customers.

And for these customers, they take a lot of time to do the tests or trials and so on.

So, I don't expect a big change overnight, but I think the good news is that the change has started, and I think that's finally happening.

And with the GAiA and the new appliances that we have, I think it's a great opportunity for customers, and I think the customers realize it now, too.

One quick final question -- the service provider vertical for Check Point, can you just talk about how big it is for the Company, what kind of activity you have experienced with the 61000 system?

I don't have specific data for the quarter, but I think the service provider and the carrier market is probably the second largest sector that we have.

I think it continued to perform okay.

There's been a few wins with the 61000, even though so far most of the 61000 that were sold were actually sold to enterprises in different areas.

So, there's still a big pipeline and a big opportunity in the telecom service provider market for that.

Good.

Thank you very much.

Thank you.

Our next question is from Jonathan Ho of William Blair.

Please state your question.

Just wanted to understand, with regards to some of the large deals that you're seeing out there, are you seeing any change in terms of the behavior relative to closure rates, or in terms of pushback from customers that need more approvals to get these deals through?

I think factually we see more transaction which allows -- you can see by the statistic, we had 66% over $50,000 and 40 transactions for 40 customers purchased more than $1 million a quarter.

Having said that, naturally when the economy, specifically in Europe, is lower or the same budget, then it requires more approvals, but we didn't see anything that I can point to clearly.

We've seen more large deals -- we haven't seen them pushed back completely or anything like that.

Got it.

And just in terms of the trade down activity that's taken place, would you expect that to accelerate where people maybe, in a tougher environment, choose to trade down even further, or do you think it's stabilized at the current levels?

Can you repeat the question, please?

When it comes to the trade down activities, so, when people are selecting maybe the lower-cost appliances, do you think that trend has reached a stabilization point?

Or do you think customers are going to continue accelerating that, where they choose a cheaper appliance, but one that can deliver strong performance?

Actually, this quarter we started to see a small move from the mid to the slightly higher levels.

So, the trend is actually starting to go to the right direction, but it's too early, just been one quarter.

I think next year it should be easier just because we have obviously better comparables as well.

And as time goes by, there's more need for throughput and economy's better, everything should take it to the right direction.

Maybe to reiterate what Tal just said, first we did some steps to rebalance some of our pricing.

In June, we did introduce another model of appliance, in the mid- to low-end, and then we shifted some of the prices to better reflect the price performance of product, and that was received well by the customers.

And that actually will help drive more into the right side of the product.

And I think over time, customers need and want them with the more performance.

Customers are running more software blades on the appliances, customers are getting more bandwidth in the Internet.

Customers are getting much faster data center within the enterprise, and so on.

So, I think over time, we have a big belief that customers will want and will need the higher performance that we can deliver.

And so, I think that it will go to the right a little bit in the future.

Got it.

And one last one in terms of the competitive environment.

I think people have talked a lot about the fast growers, but just in terms of Cisco and Juniper and maybe some of the more traditional competitors, are you seeing any stabilization there, or is it sort of the same?

I think right now, there's still some loss of share on their part.

But as far as I can see, obviously there's always an expectation that if somebody's not doing extremely well, they'll come up with a newer model and come up with dramatic news to the marketplace.

Haven't seen that really happening yet on the marketplace.

So, I think in general the market has been competitive, it is competitive.

Not too much beyond that.

Thank you.

Our next question is from the line of Philip Winslow of Credit Suisse.

Please state your question.

This is Siti Panigrahi for Phil.

I was hoping that you could provide some color on what you're seeing in terms of business trends between large enterprises and SMBs?

I think most of our sales are for mid and large enterprise.

We do have a lot of initiatives to address the SMB.

And actually, I haven't seen any specific results for the last quarter, but in recent quarters we did have some nice gains on SMB product.

Even this quarter, I think our lowest-end models, the 2200 series, has done quite well.

And I think if you still look at some potential ahead for us.

I think last year we started the big initiative on very high-end; later on we sort of refreshed our entire enterprise-grade appliances.

And clearly sometimes in the future we will have more and better news also for the very low end of the marketplace with the market.

But [on the market between] the sales and marketing front, I think we are slightly improving.

And in the product side, there's still more that we can do and will do eventually.

Thank you.

Thanks.

Our next question is from Greg Dunham of Goldman Sachs.

Please proceed with your question.

Just following up on Gregg's pricing question, is there any way to quantify the FX impact versus the mix shift?

And really the question is -- if unit growth was greater than 20% today, what has it been historically, and what is the sustainable growth rate as you look forward?

Historically, it's been much lower; it's been in the single digit, the unit growth.

So, it's a very big shift when we're talking about more than 20%.

Again, it's more than 20%.

And now, what can be the FX effect, if you [expect] that the euro for example in the last six months or so has declined approximately 15%.

I don't know -- that's the biggest one.

The Indian currency has declined in the last six to nine months by 25% and even more.

Now, trying to quantify what could we have sold more if that wouldn't happen, it's between -- again, it's between 0% to over 15%.

It would be a complete speculation.

On the economy, if the prices remained constant and so on, I think the buying power would be about 15% higher for the market.

That's a low.

I just want to add -- the reason it's hard to quantify -- all of us can calculate what the dollar did against the euro, but what we don't know is if it wouldn't have that effect, then the affected budget of customers for example in Europe would have been 15% higher, which product would they buy?

Would they buy the higher one?

Would they buy the same budget, or would they go to the lower one?

Or would they buy even more product?

Or, by the way, let's remember this, when the economy is growing, which usually means their buying power is even bigger because when the economy is doing well, customers are increasing budget.

When the economy is not doing well, customers are shrinking budget.

So, the effect could have been even much higher, had the economy been better.

Just look for one number for Europe, and again, I'm saying year-to-year comparison, it could have been -- 15% would be a good speculation for the middle.

But remember, it could've been much lower, it could've been much more.

Yes.

Our next question is from Brian Freed of Wunderlich Securities.

Please proceed with your question.

Real quick, as you think about the long-term opportunities for your annuity blades, can you talk about the pricing of your annuity blades on different hardware platforms?

Specifically, is there a lower price for an annuity blade as people transition to a lower-priced appliance?

Or does the addressable market for annuity blades over the long-term remain the same?

In this example that we have the annuity blades potential is going higher, because of the increasing number of units.

Now, the way it's priced, the -- there are service elements, service and subscription elements that's a percentage of the appliance price.

The annuity blades price, which is like three or four groups of appliances, it can be something like, let's say, $2,000 for the small appliances per year, $5,000 for the enterprise appliances.

And $7,000 or $8,000 for the higher end appliances for such a blade.

That would be roughly the order of magnitude of pricing.

It grows in groups.

It's not pure appliance or pure specific model.

It's between the -- as I said, there is three or four groups.

Between them, overall we've increased the number of units that we are seeing.

We're seeing that the potential is for higher future potential renewals, but again, we see in a year what it comes to.

So, in the specific example you gave where a customer might opt for a 12200 versus a 12400, is the opportunity for the annuity blades essentially the same regardless?

In the 12400 and 12200, I think the price for the annuity blades is the same.

Yes.

That's exactly right.

All right.

Thank you.

Our next question is from Aaron Schwartz of Jefferies & Company.

Please proceed with your question.

Good afternoon.

Just had a question on the average duration of the annuity blades.

Are you seeing any sort of shift there out to two or three years, and has there been any sort of change in discounting or pricing for multi-year versus single year?

There are more that are buying three years, but still most of them buy one year.

And remember that in many cases we give the first year bundled with the product.

So, the big shift we will see the year after.

We're seeing it now.

We're seeing it now for the IPS; we are starting to see it for the application control.

And I think for the other blades that we have, like the URL filtering, the anti-bot and so on, we will see the big shift a year down from now when these blades become -- customers become more familiar with them, that's one element.

Or with customers have used the one sort of free or one bundle year, and they come to renew them.

The good news is that we've seen very, very good renewal rates on the sort of bundled or free one, much better than we saw.

Usually in the industry, what's common is that you do something like you get renewal of something that is essentially free -- not really free, but it's included in the price.

I think in the industry, if you get 10% of people renewing, it's supposed to be good.

We think things are much, much higher -- 3,4, even 5 times bigger than that in what customers are buying, which is a great sign not just from the revenue perspective, but also from the fact that customers actually need that and use that, and that's the main good sign for the future.

I think just to remind you, before we said -- referring to the 40% which is very nice.

Also if you remember in the non-bundled, we talked about higher rates which are around 60%.

And actually after a few quarters now it looks like we've successfully increased it slightly.

I think there's more potential, but it's now getting close to the 70%, where it's actually nice improvement in the renewal rates, yes.

Okay.

That's helpful.

And I had a quick follow-up.

I know one quarter is not a trend, but sort of the mix shift to the lower end, and I know you had more unit growth there, but is there any limitation on the number of annuity blades that would be running on a lower-end box, or certain bundles that have fewer annuity blades on the lower end versus the higher end?

Currently all our appliances can run -- all of the enterprise appliances -- the enterprise -- the new models that we have from the lower one's called the 2200 and the highest one is 21400; they all run pretty much all the blades.

And they can carry that load without a problem.

They do differ in performance.

Obviously, if you want to run all the blades and to do it in a high-capacity network, you need the stronger appliance.

Okay.

If you are small company with a small number of users, you can run all the blades on something that's not very high.

Understood.

Thanks for taking the questions.

Our next question is from Walter Pritchard of Citigroup.

Please proceed with your question.

Great, thanks.

Just wondering on the guidance, as a follow-up, it seems like if I take the low end of the guidance at $315 million, I assume that software updates are up slightly on a sequential basis, just as those roll off the balance sheet.

That would put product revenue at about $106 million, which would be where it was two years ago.

And I'm just trying to get a sense of -- that sounds far worse than the worst case scenario we've heard from other companies and from the market overall.

And just wanted to get a sense of what type of either macro conditions or business-specific conditions would be affecting the Company to take product revenue that low?

The short answer is that we don't expect the worst case to happen.

The longer answer is that you have to keep in mind that more and more revenues are shifting to our subscription line with the Software Blade.

But the very simple answer that I really like to hope that the worst-case is not going to happen, and I'm not shooting for the worst-case.

And I think as you can see, we haven't gone to that case for many, many years.

So, that's the short answer.

Great.

And then, Tal, just on the buyback, it wasn't clear as to whether or not the buyback -- the higher buyback level, if you could put that in place during Q3, or is that something you have to wait until 2013 starts?

It can start now.

Okay.

Great.

Thanks for taking the questions.

Thank you.

Our next question is from Keith Weiss of Morgan Stanley.

Please proceed with your question.

I think one of the disconnects that we're trying to figure out here is that growth seemed to sustain pretty well in your 2Q if you look at billings growth -- 9% in Q1, 9% in Q2.

Based on the geographic mix that you gave us, at 39% of revenue, it looks like Europe held in pretty well from Q1 to Q2 as well.

But then the guidance range that you gave for 3Q really expanded out much more beyond what you normally do, which is a $10 million range, to levels that you guys gave back in -- kind of a range that you gave back in Q1, Q2 of 2009 when obviously conditions were pretty dire.

So, I guess what we are struggling with a little bit -- is there something you saw that's not in the income statement, not in the balance sheet, in terms of billings in your pipeline or whatnot that cause that extension or that widening of the range, or was that increased caution?

Actually, the percentage of growth in the P&L in the revenues and in the bookings are different.

You see 9% in both of them, but the Europe and the P&L is -- you remember this timing issue sometimes of service recognition and the booking recognition and the products recognition.

So, what we relate it to is what was actually in the bookings of Q2.

Okay.

So, is that saying that billings growth in Europe fell off significantly in Q2?

What it means, if I translate what Tal said, is that in the Q2, bookings in the Americas were much better than the overall booking growth, and the booking in Europe was probably a little bit less.

We have time for one quick question, operator.

Thank you.

Next question is from Tal Liani of Bank of America Merrill Lynch.

Please proceed with your question.

Service revenues, there was a deceleration this quarter in your guidance and price, and a lot of deceleration to about 10% year-over-year growth next quarter.

Should we expect it will -- if the weakness continues on the product side, should we expect it to eventually decelerate to a growth rate which is kind of single digits in the neighborhood of maybe the billing growth or the product growth?

Or is there anything else that we need to consider that could still suggest higher growth rates for the services?

Thanks.

I think where we are -- again, what you're seeing is what we have seen.

I think that there is a lot of potential going upwards in the future, and there's also a lot of risk going forward, and I think it's reflected in the range that we gave.

And reflected on many other things.

I'm always saying that predicting the future is always difficult.

And I think I may have been completely open with you on the call right now.

We have very nice pipeline, we have some very large deals that we can win this quarter or for the remainder of the year.

There's a lot of interest in the product.

We just held our, for example, a Check Point experience conference in Europe this quarter.

And in the US actually, too.

And the European one was an amazing conference with huge attendance, high level of interest.

Yet in the same time if you look at the economy, if you look at the purchase level, they are not there.

So, if what we are seeing in the marketplace in terms of the level of interest, in terms of the security solutions that we have, in terms of the refresh cycle is going to bear fruit, we're going to see very, very good results in the future.

It can be Q3, more likely to be Q4, and hopefully even more in 2013.

If we are seeing the economy dominate, then lower guidance that we see is going to dominate.

I tend to be optimistic, and I like to hope for the good, but I also have to be very realistic and share the risks with everyone on the call.

All right.

Thank you very much, everybody.

We appreciate all your attendance, and we look forward to speaking to you in the near future.

Thank you.

This concludes today's teleconference.

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