Check Point Software Technologies Ltd (CHKP) 2012 Q4 法說會逐字稿

Greetings and welcome to the Check Point fiscal year 2012 and fourth 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 E. Meintzer, head of Global Investor Relations for Check Point Software Technologies.

Thank you, Mr. Meintzer, you may begin.

Thank you.

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

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

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

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

For your convenience, the conference call replay will be available through January 30.

If you'd like to reach us after the call, please contact Investor Relations by emailing kip@checkpoint.com or by phone at 650-628-2040.

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

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

These forward looking statements may include our expectations regarding demand for our security products, our expectations regarding the introduction of new products, programs, and the success of those products and programs, and our expectations regarding our business and financial outlook for the first quarter and full year of 2013.

Other statements which may be made in response to questions, which refer to our beliefs, plans, expectations or intentions, are also forward looking statements within the meaning of 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 uncertainties.

And, actual results could differ materially from Check Point's current expectations and beliefs.

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

As a reminder, Check Point assumes no obligation to update its forward looking statements 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, I'd like to turn the call over to Check Point's Chief Financial Officer, Tal Payne, for a review of the financial results.

Thank you, Kip, and hello everyone.

I'd like to thank you all for joining us today for the review of the fourth quarter and the full year financial results.

Our revenues for the year increased by 8% year-over-year, and non-GAAP EPS was $3.19, at the top of our guidance and representing an 11% growth.

Before I proceed further into the numbers, let me remind you that our fourth quarter and full year 2012 GAAP financial results include non-cash equity-based compensation charges, amortization of acquired intangible assets and their related tax effects.

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

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

In the fourth quarter, our revenues reached $369 million, representing an increase of 3%, compared to $357 million in the fourth quarter of 2011.

Our software update maintenance and subscription revenues reached $218 million, representing a growth of 10% year-over-year.

The growth was driven by our update and maintenance revenues, as well as our annuity software blades that are recognized as a subscription.

We continue to see great success in our annuity blades led by IPS, Application Control, and Antivirus.

Anti-Bot, which was launched earlier this year, is picking up nicely, as well, with thousands of units sold so far.

Software blades revenues increased by over 35% year-over-year and are now over 20% of our service revenues.

Product and license revenues were $151 million, lower than last year's $158 million.

These results were affected by weakening economy and by the transition to our new appliance product line.

On a positive note, sequentially both revenues and enterprise gateway units has increased by over 30%.

Revenue distribution by geography for the quarter was as follows.

Americas contributed 45% of revenue, Europe with 37%, and Asia Pacific and Japan, Middle East, and Africa region contributed the remaining 18%.

Overall, deferred revenue as of December 31, 2012, was $590 million, an increase of $37.5 million, or 7%, over December 31, 2011.

The growth rate is slower compared to 2011 for the following main three reasons.

First, last year the fourth quarter had 52% growth in long-term deferred revenues.

This growth was as a result of update maintenance and subscribing bookings that are over 12 months and came early.

Consequently, 2012 bookings were reduced but not the [line ready] or the annualized contract value we have seen.

Secondly, software blade deferred revenues continue to increase significantly.

Naturally, the growth rate is slower than last year and the total amount is much more significant.

And, third, as product bookings slowed down this year as we went through a transition to the new appliances, the related new services bookings are lower.

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

Transactions greater than $50,000 accounted for 67% of total order value, similar to last year.

We had 62 customers that each had transactions with a value greater than $1 million compared to 49 in the same period last year.

Non-GAAP operating margin for the quarter reached 60%, same as in the quarter -- in the fourth quarter last year.

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

GAAP net income for the fourth quarter of 2012 was $174 million, or $0.85 per diluted share, up from $160 million, or $0.75 per diluted share, in the same period a year ago, representing a year-over-year increase of 13%.

Non-GAAP net income for the quarter was $185 million, or $0.91 per diluted share, up from $178 million, or $0.84 per diluted share, in the same period a year ago.

Non-GAAP earning per share reached the high end of our guidance, representing 8% growth year-over-year.

Our cash balances reached $3.295 billion at the end of the quarter.

Our operating cash flow this quarter was very strong and reached $202 million, representing 17% growth year-over-year.

Collection continues to be strong with our DSO at 74 days, similar to the end of the previous quarter.

We hedge our balance sheet against currency fluctuations.

During the quarter, the dollar weakened against most currencies in the world, resulting in a hedge contribution of approximately $10 million to our cash flow with no effect on our P&L as expected.

During the quarter, we purchased approximately 3.6 million shares for a total cost of $160 million.

If we look at 2012 fiscal year highlights, for the year ended December 31, 2012, revenues were $1.34 billion, an increase of 8%, compared to $1.25 billion last year.

Non-GAAP net income was $668 million, an increase of 9% compared to $614 million in 2011.

Non-GAAP EPS for 2012 was $3.19, an increase of 11% compared to $2.87 in 2011.

On the operating side, we achieved non-GAAP operating margin of 59% for the year, up from 58% in 2011.

As a reminder, around 40% of our expenses are in local currencies other than the US dollar.

In 2012, the dollar strengthened against most of these local currencies and reduced our cost in dollars.

As of the end of 2012, the dollar weakened against our main local currencies.

Therefore, our expenses for 2013 are expected to increase.

For the year, cash flow from operations has reached a record of $816 million, an increase of 14% compared to last year.

And now, let's turn the call over to Gil for his thoughts on the fourth quarter and the year.

Thank you, Tal, and I'd also like to thank everyone for joining us on the call today.

Tal has already addressed the financial results for the quarter and full year.

I'd like to take this time to share some further information with you regarding the business and our future plan.

2012 marked a year of transition for our customers as they began adopting our new portfolio of security appliances that deliver approximately three times the performance.

This transition had some good and some challenging effects on our business.

On one hand, we saw a healthy increase of 15% in a number of enterprise gateway we shipped in 2012.

On the other hand, some customers have chosen less expensive models given the power of our new appliance line, resulting in a decline of the average selling price.

We saw a nice improvement in Virtual in the third and fourth quarter as customers shifted to a higher priced and higher performance model.

From a geographical standpoint, the softness in the economy has impacted our business.

In the third quarter, we saw these effects mainly in Europe.

In the fourth quarter, Europe started to improve, but North America suffered the weakness compared to an exceptionally strong fourth quarter in 2011.

Last year was a year of healthy innovation and great recognition for Check Point by the industry.

ThreatCloud is one of the most significant initiatives that we launched last year.

The realization that each customer shouldn't fight the world of cyber threat alone, and full collaboration we can get to much better protection is very important.

ThreatCloud is translating this idea into reality.

Every gateway can contribute attack information to our cloud, our ThreatCloud service will analyze it and compare multiple vectors of attacks.

In real time, we can distribute automatically new defenses to our customers.

ThreatCloud was well received by the industry and our customers.

To date, we have more than 2,500 gateways that contribute threat information to our cloud.

This is a big number to start with but it is only a tiny fraction of the potential.

Our Anti-Bot software blade, which uses ThreatCloud infrastructure to detect and defend against bots has also done well.

Bots are self software agents that hide inside our computers and are ready to perform malicious activities through instructions of their remote operators.

Bots have been used in many targeted attack as well as some other mass attacks.

Our research found active bots in over 60% of networks.

This means that almost every company is affected and vulnerable today to bots.

Therefore, the network line layer of defense against bots is crucial.

We intend to continue and raise the bar for security and provide additional layer of security and add in-depth security focus in every element of our product in time.

Next year, we intend to further develop and introduce new and innovative threat prevention solutions.

In addition, we will also extend our offerings in the mobility area.

I believe that cyber threat and mobility are the two most important areas in security these days.

And, we intend to provide the leading technologies to keep the enterprises worldwide secure.

This bring me to the financial outlook.

You know my regular caveat, it is always hard to predict the future.

There are many factors that should weigh in.

The increased need for cyber security is an important factor.

Yet, at the same time, the economy can warrant a more conservative approach.

As always, we take a realistic approach that has risks in it as well as potential of up side.

For 2013 we expect revenues in the range of $1.4 billion to $1.45 billion.

And, non-GAAP earning per share in the range of $3.30 to $3.50.

GAAP EPS is expected to be approximately $0.26 less than that.

For the first quarter, we expect revenues in the range of $320 million to $332 million, and non-GAAP earnings per share in the range of $0.74 to $0.80 per share.

GAAP earning per share is expected to be approximately $0.06 less.

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

Thank you.

Thank you.

We will now be conducting a question-and-answer session.

(Operator Instructions)

Shelly [Sirefrack], FBN.

Yes, you talked about the dollar weakening at the end of the year.

That would, I would think, help your revenue in the first quarter and the year.

Can you talk about what you're seeing?

I think your guidance is a little bit lower than consensus currently.

Maybe you can talk about trends you're seeing in Europe from the fourth quarter, as well?

Thanks.

Relating to the dollar, relating to the effect that it has on our expenses.

Obviously, some of our expenses are in local currencies that are not the dollar.

And, as a result, the dollar is weakening, then it's an increase of the dollar expenses.

When we look at the revenues, obviously revenues are affected for the booking.

This year we see that the bookings helped to contribute to the appliance, but product booking was pretty much slow, very slow growth affected from the mix shift.

Going into next year, hopefully we'll start to see, as the quarters pass by, more and more increase in the product growth in the revenues.

Can you also talk the unit growth you had in products in the fourth quarter, appliance unit growth?

Appliance unit growth versus Q4 did not increase.

While ASB did increase, so we start to see customers actually picking up into higher models.

Q4 last year of very strong, as Gil mentioned, it was quite a strong quarter, both in units and in dollars.

It was quite a tough compare.

Again, going into next year, we would like to see a growth in the number of units which would translate into a growth in the dollars.

Since we did see also in Q3 and in Q4 stabilization and an increase in the ASB versus the year before.

Okay.

Thank you.

Shaul Eyal, Oppenheimer and Company.

Thank you.

Hi, good afternoon everybody.

Tal or Gil, can you talk to us about the high end appliances, the 61,000 and 21,400?

How did those perform during the quarter?

The 61,000 continued to do well.

We shipped many units.

Again, we have a long pipeline and many, many projects that work on it.

It's a relatively longer cycle for that kind of an appliance.

But, last year which was the first full year that we shipped it, we shipped very nice number of units overall.

For the 21,400, actually Q4 of excellent.

The number of units went up drastically.

I think that was the result both of the fact that we are now ahead of the security acceleration unit that we introduced in the middle of the year, that can provide very high throughput as well as the industry best latency numbers.

Up 5 microseconds in latency as well as some changes which we did in the pricing.

We've actually introduced a new model, the 21,600, using the same architecture but a faster processor.

And, as a result of that, we slightly reduced the price on the 21,400.

The overall result was excellent.

We sold, I think, almost all the units we could have shipped.

Got it.

Gil, in your prepared remarks you spoke about on the transition the company has been going through over 2012.

When do you expect this transition phase to be mostly completed?

I think by now we are relatively complete.

By the Q4 quarter, we had over 90% of the units made from the new product line.

I think we're also seeing that the software blades, our adoption is very, very light.

And, there's been over 50% growth in revenues from software blades last year.

And, the run rate of that is high and is growing in the double-digit numbers.

So, that's a very positive trend, too.

And, I think if everything goes right and if we see the right adoption, we are ready for a new year of upside growth.

I think not all of it is reflected in the outlook that I gave.

I think what I gave is as an outlook is, I will say, realistic to conservative.

But, I think there's a lot of potential in what we have right now.

And, I think we will be very aggressive next year in marketing these messages to the marketplace.

Yes, I will just add that, to your question, the anniversary we start next year.

Obviously 90% in Q4.

In Q1, maybe 60% or 70%.

So, throughout the quarters next year, we should become more and more austere comparable in a sense.

Thank you for that additional color.

Good luck.

Thanks.

Aaron Schwartz, Jefferies and Company.

Good morning.

I had a question on the comments you made on the bookings growth.

You gave a few reasons of the growth there, but one of them was that it slowed down here due to the transition to the new appliances.

It was our understanding that this was, the transition to the new appliances, was neutral to bookings growth because you make up for the loss in maybe product growth with the upside in deferred revenue growth.

I was wondering if you could flush that point out a little bit more?

Sure.

You're absolutely right.

It's just that it's typically -- if last year the product growth was 13% and this year it was pretty much flat.

Then, obviously the potential of the growth is lower, right?

So, it was more a comp issue, it wasn't really due specifically to the --.

Exactly, exactly.

Yes.

Okay.

And then, the second question I have, if I could, given the new appliances that you shipped over the last 12 months, it seems like there were a lot more pre-bundled software blades pushed out into your customer base.

Can you just walk through how you think about, or your expectations for, renewal rates over the next twelve month and how that factors in your guidance?

Thank you.

The way we sale the software blades, some software blades are bundled with each appliance.

And, from an accounting perspective, that means that when somebody buys a product some revenue is recognized right when we ship the product and some revenue is deferred for the next year because that goes to the services line, it's a subscription in the maintenance of the software blade.

Then, customers can also buy a la cart blade.

And, in the following year, once the bundled blade are expiring we can renew them.

Right now we've actually seen an increase in the percentage of renewals.

Close to 50% of customers that got bundled blades renewed them the following year, which I think is an astonishing number.

I think it's very, very high.

Usually when you bundle something with a product you expect 10%, or something like that, of customers who actually buy the following year.

We're seeing almost 50% the customers doing that which mean the customers definitely recognize the value of the blades and their unique functionality.

And, the biggest growth that we are seeing in terms of blade sales is down bundled blades.

The blades that people choose to buy and not the blade that we bundled with the product.

So, that's actually quite positive both with factors are quite positive in the way we look at blades.

Still, if we started with blades two years ago, we've, I don't know, $10s of millions or even less than that in revenue, and it grew very, very fast.

Today, we are running at $100s of millions of dollars of run rate.

And, that growth rate is not expected to continue in the same percentage moving forward.

But, I think it will be a nice double-digit growth for some more time.

Next question, operator.

Jonathan Ruykhaver, Stephens.

Yes, good morning.

I'm curious, can you talk about the activity you might be seeing on the IP series install base?

I think the GAiA operating system has been in the market for about a year.

I'm wondering if you're seeing any conversion at this point, or is it still too early in that process?

GAiAs in the market for like eight months now.

I mean, eight months from the time we introduced it.

It takes more time until customers get familiar with it.

I get a very positive feedback on that.

People like it.

People like the fact that they can use it on the IP appliances, and people are looking forward to operating the IP appliances into the new series.

Keep in mind that what GAiA enabled people to do is to convert all IP appliances into newer appliances and use the same command line interface, the same features, the same functions that they had on the IP series and getting the functionality between the appliances is important for conversion.

Overall, what we are getting is positive acceptance on the new and the old appliances.

Do you have any concerns that within that IP install base customers are putting out RFP activity and looking to evaluate other vendors outside of Check Point?

Not really.

I think the IP series customers are probably the most loyal customers.

That's why they chose this hardware and so on from us.

It is competitive activity all the time.

And, that's happening every day.

And, I think we win that too.

Competition is definitely not something that they're not used to in the marketplace.

I would just add that if you look at the total at the end of this year, the number of units increased and the core appliances increased approximately 15%.

And, we know that the IP series is really -- we sale only low 100s.

So, obviously if we would have lost it we would have seen a significant reduction in number of units so I don't think that's the case.

Okay, one final quick question.

Do you see on the new higher performing hardware the opportunity for customers to run more blades than what they've been running on the older hardware?

Yes, absolutely, that's one of the educational aspects which we need to do.

Because if the customer has -- I think that somewhat explains also what we were seeing in the last two quarters.

In the beginning customers have just said, you know, if we can get there for $25,000 in deposits -- say $25,000 for performance X, now we can get 50% more performance for $15,000, let's say.

Why not buy the lower end model?

I think part of our education process it to explain to customers that the reason they need the new model is so they can run more security functionality aspects.

And, we are seeing that.

I mean, I think that a very high percentage of customers over IPS, and IPS has a big impact on performance.

And, we're seeing that more and more customers start deploying more and more blades in there.

I think that's part of the educational process.

You got more power, use it to deliver more security.

Right, good enough.

Thank you.

Michael Turits, Raymond James.

A couple of clarifications and then a question about services.

First of all, I just want to make sure I got it on units, you said that units were up 15% for the full year, but did you say they were flat year over year in the fourth quarter?

In the fourth quarter, it was pretty flat, yes.

Okay.

And then, that was a nice number, Gil, on the 50% increase in bundled renewals of blades.

I think that was up from 40% previously.

Where are you on stand alone renewals?

I think the prior metric was about 60% previously.

It's actually moved up.

The last time we talked about it it was 60%.

Then, if you remember, I think Q2 or Q3 I said we see it picking up, but it was too early.

The last quarter we had even higher.

It's between 65% to 70%.

So, it's improving, and I hope it will continue.

Yes, so that's picked up, as well?

Yes.

One question on the fourth quarter, the -- your services only grew 3% sequentially.

Typically they grow a lot higher.

I think -- I'm curious as to why they didn't?

And, especially because the expectation was that in the third quarter there were some renewals that had been pushed off as you were trying to move toward more co-termination.

Actually, third quarter we had the same phenomena.

If you look at the Q3 long-term contract also increased significantly.

If you look at Q4, you see also it increased significantly.

So, it had the same effect both in Q3 and in Q4.

Remember, I mentioned three reason.

One, the long-term contract which has a big effect.

Probably, it explains 6% or 7% of the growth.

So, it's quite significant.

In fact, you can see by the numbers, you can calculate it if you look at the long term.

Software blades is growing amazingly nice.

But, obviously as that number is $100s of millions as now, like low $100s of millions, then the growth rate is slowing down.

So, it's a significant double-digit, but it's not the rate that you had last year.

That's obviously reducing the growth rate, as well.

And, as a result of the fact that product booking is not growing, and if it's not growing, you don't get the new attachment of the new services.

Right.

And, just a quick one, any thoughts on the tax rate going forward?

I would assume the same like last year.

I always say it can go up 1%, down 1%, around 20%, 21% just like last year, for now.

Okay, great.

Thanks very much, guys.

Gregg Moskowitz, Cowen and Company.

Thank you very much.

Good afternoon, Gil and Tal.

Just a couple of questions.

On the guidance for this year, at the mid-point of the range, your EPS guidance, I believe, assumes a significantly lower operating margin than what you showed in 2012.

Just as a back of the envelope, I'm getting somewhere near 56%, again at the mid-point.

Based on current exchange rates, what I was wonder, Tal, because you referred to currency, about how much more of an expense will you see this year because of currency?

And, is there anything else that's being factored into your margin assumptions that we should be aware of?

Sure, so I'll say two main things.

Last year in 2012, the dollar got stronger.

So, we actually benefited probably around $15 million or so for the full year.

Next year, so I'm taking the year end rate, then we're probably losing around same number.

Between $10 million to $15 million assuming the rate of the end of the year.

So, that's obviously an effect of about 1% in your calculation.

Taking into account also that the income, financial income, as the time goes by, we have lower and lower interest income that we're getting since now, as you know, it's very, very low rates that you go to get on the government bonds and corporate bonds.

We are very conservative in the way we manage our cash.

And, therefore, it's going down.

We need to take this into effect to get to the number.

Okay, that's helpful.

Tal, was there any variance this quarter between billings and bookings along the lines that you saw in the third quarter?

Between billings and booking?

Not a significant one.

That's why I didn't mention a specific explanation.

Okay.

Then lastly, you did nicely increase your stock buyback in the quarter.

Was this more a function of you being opportunistic, or should we be thinking about this as a more realistic quarterly buyback level going forward?

Thanks.

I think we approved a program of up to $1 billion up to two years.

We started with it small.

If you calculated this average, $125 million a quarter, for the last two quarters, we did more.

And, every quarter we look at it and make a decision.

We are more opportunistic than before.

But I think, just to be clear, I think that we can expect this kind of levels in many quarters moving forward.

It depends on many factors, it can lead to share price.

In terms of we are ready to spend this amount, and we are ready to buy at this rate.

And, sometimes even at higher rates.

Great.

Thanks, very much.

Fred Grieb, Nomura Securities.

Hi, thanks, two questions for me.

First, you mentioned the 2012 refresh of products where you increased performance by about three times on average.

How long until the next comprehensive and significant product refresh?

Then, second question, just around CapEx.

It was a bit higher than we expected.

I'm wondering if there were any anomalies in the quarter or if this is the rate we can expect going forward?

Regarding the product refresh, I think the kind of refresh which we did now of unified to product cloud just a year ago, unified to product line and coming up with a complete lineup of product, I don't know when to expect that.

I do think that we will keep coming with new models that improve performance or that are important to different segments of the market this year and every year.

I think there are a few, I would say, new sub-product lines and new specific products that are scheduled for 2013, and that will happen all the time.

Next call, please.

Daniel Ives, FBR.

Yes, guys, just on the trajectory of deferred revenue throughout the year, should there -- it be normal historical patterns or anything unusual?

Yes.

It's -- I would say yes, but remember that I always said that it can fluctuate easily between quarters depending on when the customer is bringing in their contract.

Sometimes they're bring it earlier, sometimes they're bringing a long-term contract that affects the next quarter.

So, in general, you don't have better assumption than that, so I would assume the regular rates.

Okay.

In part of your year-end guidance, what type of reversal in ASPs relative 2012, just anecdotally, are you factoring in?

We don't study ASP.

Okay, thanks.

Dan Cummins, B. Riley.

Thank you, first question for Tal.

The sales and marketing line was down year over year on a full-year basis, 2012 versus 2011.

Do you expect that line to be up this year?

Can you give us some sense of are you making permanent changes to cost structure right now to be able to show that kind of performance, particularly with some really aggressive competitors in the market?

Then, I have a question about the data center business.

I'll try to answer about the future.

We've actually invested a lot this year in sales, specifically, and also in marketing.

I think we've -- in the last quarter, the last four months we've added many, many people to the sales force.

I think next year we hope to see results from that.

We're starting 2013 with a sales force that's much, much bigger than what we had last year.

In terms of future investment, we are making future investment.

I think we do believe that if we are being more aggressive in front of customers, presenting what we have to present, we can win more opportunities and enlarge our footprint.

Regarding the financial impact last year, I don't know, Tal, if you want to talk more about that.

Yes, I would just say obviously if the booking -- the commission and bonuses is affected by the amount of booking.

And, since the growth wasn't as strong as last year, then obviously it affects the amount of the commission.

That's why you see a lower number comparing to last year.

But, you don't feel the pressure to spend more to get recognition for the product commensurate with, for example, what Gardner is saying in comparing Check Point to Palo Alto?

You seem to be peers.

I'm just curious if there isn't more opportunity for Check Point to spend faster and more aggressively to maintain and gain mind share.

I think you're absolutely right.

We should do more and we are doing more.

I think this year we did get a lot of improvement in accessory port which gave us a very high rating.

We are in the Gardner in leading quarter for all the sectors we're playing in.

The IBC finally recognized us as the number-one vendor in the UTM and firewall achievement.

This took us a long to get that recognition even though I think we were in that position before.

I think we can do more.

This is a small part of the marketing investment.

I think we can do more on that.

The biggest affect on the sales and marketing is the number of sales people.

Again, we are -- we have made significant investment in sales people in the last part of 2012.

And, I think we will see the financial impact of that in 2013.

We show some of it, I mean, the payroll for most of the sales people is already in the fourth quarter of 2012.

We will see the full-year effect and hopefully the commission effect of that, more of the commission effect of that in 2013.

Okay, thanks, can I ask you a quick question about the data center landscape?

First, I'm curious how many installation are still out there on Crossbeam, which was traded and sold last quarter?

If you could give us a sense of how many -- what kind of hardware deployments are you seeing with respect to those customers that may still be just acquiring software from Check Point and doing their own installation on hardware, on virtual hardware?

Thank you.

On Crossbeam, again, I don't want to comment about their business, but as far as I understand they're doing okay.

And, we are selling some of the Crossbeam equipment ourselves, and some they are selling themselves.

We are continuing to be very, very good partners to Crossbeam, and so on.

The second part was about the --?

Oh, on third-party hardware, particularly in high-end deployments.

Where do you stand on that?

Third-party hardware is less popular in high-end deployment.

It's software only.

I don't know, Tal, if you have the numbers, but I think the vast majority of our business today is appliances.

There is about 10% to 15% of products revenue that is coming from selling software only.

Is that about right?

That's about right, yes.

All right, next --.

Thank you.

Next call, please.

Sterling Auty, JPMorgan.

Thanks, hi guys.

On the software blade revenue, I think in the fourth quarter last year you mentioned that the revenue was approaching 10% of total revenue.

You gave a couple of metrics, but I was a little confused.

Can you give us something that level sets to give us a sense of what the blade revenue was for all of 2012 so we can see what the growth rate was?

I think 10% was from the total revenues.

Okay, when I said this quarter in my script, I said 20% of the service revenues.

But, you can calculate it easily.

I also said that the software blade revenues increased in Q4 over 35%.

And, total year, meaning 2012 versus 2011, it was over 50%.

Okay.

And, could you give us a sense, like you did last year, when you look at for the full year maybe just rank order what's the biggest revenue contributors within the blades at this point?

IPS, Application Control, and then Antivirus and URL probably.

Anti-Bot is picking up.

It's a few million dollars.

Tal gave you the right order.

IPS, for example -- and, by the way, with IPS today, we have a huge install base.

I think by now we are the largest IPS vendor in terms of installed gateways.

And we have more installation of IPS than all the stand alone IPS vendors combined even.

I think we've built a very nice business around it.

But, the software application control is picking up nicely, and we recently started seeing things like the Antivirus and the URL featuring and so on also picking up.

Got you.

On the March quarter guidance that you gave, how should we think about the product revenue line?

Should we expect it to still be down year over year, or now that you've annualized, would it be closer to flat or even up?

I think slightly up compared to last year.

Okay, and then, last question.

I concur, I like the increase in the share repurchase.

But, with well over $3 billion in cash, can you just update us on the status of maybe what's happening on the tax side?

And, why not get much more aggressive?

You've had a large cash balance.

While you talked about acquisitions in the past we haven't seen a major one.

And, I still think with over $3 billion in cash there's plenty of room to be a lot more aggressive on share repurchase, as well as maybe even do some acquisition.

Just walk me through the approach to both of those.

So, first I will say that if we -- our operating cash flow this year was $860 million.

So, we have a lot of cash that's produced every year, as you say.

Our buyback right now is around $500 million.

But, as Gil said, we can be more aggressive as well, as much as we feel is relevant and right.

So, we also have $100s of millions left from that balance from the historical cash that we can still use.

I think we have as much as we need.

You're right, that there is a new tax law in Israel that if we want to and we have until the end of the year to make a decision if we would like to use the rest of the cash, we can, subject to additional taxes that we will pay.

And, we will consider it.

I think, moving forward, we absolutely will be happy to find the right acquisition opportunity.

I think that, again, the timing for something that has a lot of strategic significance, and that's not easy to find.

I think it's -- there are companies that we can acquire and have, for a year or two years, show a nice increase in revenues.

But, they won't contribute either to the strategy or to the long-term growth for us.

I really want to avoid getting into this game of getting addicted to doing acquisition for the sake of financial engineering.

I'm really, really looking for the right opportunities that can have an impact and that fit our architecture and synergy.

And, these are not easy to find.

I can tell you that we absolutely want to do some, and we're absolutely looking for some.

And, I hope that in the future we will find some acquisitions beyond small technological ones, but more significant to the revenues and to the company growth.

All right, Gil, I think that's a good point.

I think because of that challenge and that difficulty maybe it wouldn't be a larger acquisition, it would be smaller.

Which goes back to the point of with the cash balance that you have, it would seem like you could be a lot more aggressive, whether it's through something more one time like a tender offer or something else from a strategic to be able to fit both of those needs.

Okay.

Thank you.

Brent Thill, UBS.

Thank you.

Tal, I just want to follow up on unit growth and ASPs.

Can you just restate what is embedded in the guidance for '13?

I didn't understand the steady ASP.

Can you just walk through --?

Sure, sure.

I think the question was what did we assume regarding the ASP for 2013.

And I said, in 2012 we experienced -- it was actually was as a result of transition and so on.

2013, we expect stabilization in the ASP.

And, therefore -- which means that we assume that the number of units will grow in order to achieve the guidance.

Okay, just back to the guidance.

I think at the mid-point you're assuming the growth rate to be underneath actually the growth rate of the overall market that you're serving, the network security side.

Can you just talk through, Gil, your realistic to conservative approach in the guidance this year versus last year.

Is there a different approach you're taking in terms of the number that you're giving the street, or is this similar forecasting methodology that you used in the past?

I think, honestly, the economy has an affect on the mood and general cautiousness that we take on this year.

I don't think that we've grown in the last few years below the industry rate.

I think we've gotten higher rates from the industry that we are serving.

And, I think we've taken share from some other vendors.

I hope that that will continue to be the situation moving forward.

But, I think that we really need to be -- we have a methodology looking at the economy, looking at the market growth rates, looking at our own forecast which I think is the biggest factor.

Collecting the feedback bottom up from our -- the projects that we're working on.

And, I think so far that that works fine.

I think we've been able to deliver the numbers that we wanted in relatively, to be within our range, in a relatively consistent way for next year.

I hope to continue and hopefully we'll be able to surprise ourselves in the future, too, with some upside.

Thank you.

Walter Pritchard, Citigroup.

Hi, thanks.

Sorry, just another question here on the unit and ASP math.

I think you said -- well, we see the product revenue decline by about 5% year over year in the quarter.

I think you said that units were flat and ASPs were up.

I'm just wondering what's the other variable there that drove product revenue down, given flat and up ASPs?

So, I said it was on average flat, it went slightly down and the ASP went slightly up.

So, in total -- bear in mind when looking at revenues, right, so there's some timing between revenues and booking.

I was relating to the booking.

Okay, got it.

Then, when I think about what you -- the headwinds that you saw this year and how we should think about those next year in term of ASPs, can you talk about where amongst the product line you saw the biggest headwinds in terms of low end, mid-range, and high end?

And, how your confidence in term of those ASP headwinds reversing by segment?

Just trying to get another level of detail there.

I think we didn't see any headwinds that we were difficult to computer to sell for us.

I think the main thing is the mix.

There were customers that wanted -- that before used to pay $25,000 for a product now said they can get the same performance, the same architecture, the same Check Point equipment, and 50% more performance for $15,000.

Our job is on to convince these customers that they can actually benefit from the extra performance because they will utilize more software blades.

And, I think towards the second half of the year we started to be able to deliver that message to customers and starting seeing various fields, the product mix starting to go back up a little bit.

Okay, great.

Thank you.

Keith Weiss, Morgan Stanley.

Thank you guys, for taking my question.

One of the things that came up in a lot of conversations, and I think there's a lot of chatter in the industry about particularly in Q4, was the idea of increased pricing pressure in network security overall.

When you guys look at your business, how do you parse out impact from potential pricing pressure versus the trade down impact that you've been talking about?

I think some of it may be phenomena of it, the phenomena of increased competition.

And, I think part of our job is to convince customers the value of our product.

And, I think there is a lot of value.

There are many vendors out there, competing vendors that can come back and say, you know, you can get for less more performance and so on.

We actually became recently much more aggressive about that and underlining that.

And, we have very interesting findings that we've seen in the competitive landscape.

For example, one vendor would only inspect the first part of the connection, and ignored the tail end of the connection.

Again, leaving a lot of vulnerabilities to come in when the hackers find out about that.

And, another vendor wants to make a lot noise about the security of their product, actually checks only one direction of the traffic being transferred, and the direction that has less traffic which means they leave 90% of traffic uninspected.

So, no wonder they can claim high performance if they only inspect 10% of the traffic.

Again, I think that once more of these kinds of things get revealed, customer will understand the superiority of the Check Point product and why we should get more security and not try to go in the simplistic messages of get from us more performance or things like that.

As I said, I think we are becoming a little bit more aggressive on that.

We are investing more in educating customers in the field.

And yes, I think one thing that has been changing our DNA, and I hope it will continue for many years to come, is we want to sell based on the merits and the benefits of our technology, of our security, and not the sale based on negative publicity or negative values of other vendors.

I think we're trying to keep the balance here, not losing because we are not communicating the right messages.

And, educate the customers about the security value that they get from us, and hopefully more and more customers will get it.

Obviously, we're the number-one vendor in all the fields that we're playing in.

I think obviously the market gets that message.

But, definitely we can do more and win more share.

Excellent, and perhaps one for Tal.

When we're looking at the full-year guidance for 2013, I think we have about 6% growth at the mid-point.

In light of the back half of 2012 where you saw billings grow basically flat year-on-year, how should we be thinking about the mix between products and services?

Or maybe the growth of the services piece of revenue versus product?

I'd assume that services is going to be more impacted by what you put on the balance sheet on the back half of 2012.

I think -- remember, we expect or we plan for two phenomena.

Some of them are completely mathematical, right?

We had, because of the transition, we had the zero and in some quarters, negative growth in the product as you've seen in Q3 and Q4.

When we go to next year, we'd like to start to see the growth coming back into the product line, right?

That's one assumptions.

To start to see -- we assume ASP similar to last year, similar to 2012.

Now, if we succeed to increase the unit, bear in mind we're coming out of a double-digit unit growth year.

So, if we succeed to increase all our units, that's the growth in the product you will see.

That's one assumption.

And, the second, remember that over time, because software blade becomes so significant, and I told you it affects 20% of the revenues already, then the total amount is bigger.

It's growing at beautiful double-digit growth but --.

20% of service revenue.

20% of service revenue, correct.

So, it's already a significant amount.

So, the growth rate is slowing down over time, although it's still very strong and much more upbeat than maintenance growth.

By definition, there is some deceleration in the service growth and hopefully some acceleration in the product growth that gets us to the mid-point that we provided you in the guidance.

Got it.

Do both lines pretty much converge on that 6% growth rate?

Over time, that's what I expect to happen.

Excellent.

Thank you.

Jonathan Ho, William Blair.

Good morning, guys.

Hello?

Yes.

Yes, we're with you.

Sorry about that.

Can you guys talk a little bit about the competitive landscape and whether you're seeing either stabilization from some of the larger players that you've been taking share from or increased aggression from the smaller players?

Just want to get a sense of what you're seeing out there.

I think we've talked a little about some of the competitive findings that we have recently.

I think some of the larger vendors as far as IP are not gaining ground at this point.

And, we're taking share from some of the smaller vendors.

I think you know that are doing well.

And, are growing.

I think when we analyze what they are doing it's not always for the great benefit of the customer.

I think, if I put it that way, some customers have already realized that some of the large vendors, that we can deliver much better security and much better value than some of the large vendors.

I think sooner customers will realize it more as it pertains to some of the smaller customers -- smaller vendors, sorry.

Got it.

And, just to follow up on your comments around the reversals and some of the trade-downs that's you're seeing and that trend in the third and fourth quarter, can you just give us by rank order what are some of the reasons why people are going to trade up?

Is it increasing network speeds, is it just that performance requirement?

What are some of the other factors, certifications that could weigh in in 2013 to support that trend?

First, metric performance is always a factor.

There's always the assumptions in technology that you need more bandwidth, you need more effects.

The main reason we were speaking with customers they will need more is because we will activate more software blades.

And, the road performance versus the real world performance for our products, as well as all the other products in the industry, are very different.

We'd like to encourage customers to use more and more software blades and get more security.

That's why they're buying the products for.

And, therefore, they need more and more power, and that's when I think we will prove to them with our SBU security power unit measure, and so on, how much -- we will show them how much they need, how much room for growth they've got.

So, they can keep the same hardware for a longer time and activate more blades on the same unit that they buy in the future.

And, how it competes effectively against other products in the industry, as well.

Great.

Thank you.

Tal Liani, Bank of America.

Hi, hope you can hear me, I picked up the phone.

I have two questions.

First one is, what is the percentage of appliances as a percentage of sales?

I'm trying to understand why we haven't seen already acceleration of growth if the percentage of appliance -- sorry, the percentage of new appliances went up from zero to 80% in the first three quarters of the year and 80% to 90% in the last quarter of the year, this 10% is so smaller than what we've seen before?

You should have seen acceleration there.

Maybe the explanation is the appliances are a smaller part than I thought as a percentage of product sales, if you can give some color there.

Second question is about service revenues.

We have seen decline in product revenues the last two quarters.

Does it translate into weaker than -- weaker growth rate in service revenues for the next two quarters given the lag in recognition between products and services?

Thanks.

I didn't understand the method in the first part of the question.

And, I didn't understand the second question.

So, it would help me if you repeat it.

Okay.

So, the first question is just about what is the percentage of revenues that you generate from appliances in products?

So, what --.

Sorry.

So, that didn't change significantly throughout the year.

But, we did -- your comparison in the terms of the total booking is year over year.

So, last year it was -- the majority of the year was all the appliances, this year, the majority of the year was the new appliances.

All the quarters pretty much suffered from the same phenomena.

And, I would like to add also, that our appliances, which is the core of our business, are actually doing quite well and are growing.

The parts that are actually more -- I wouldn't say shrinking or eroding, it's not shrinking, it's more eroding, is actually the known appliance part of our revenue line.

If we got the software only revenue to be freezing or eroding a little bit of appliance growth actually pays off for this.

The appliances themselves we have good numbers.

There are no declines by any means.

So, -- but what is the percentage of appliance?

Is it the majority of revenues, appliances, or are there other things?

No, the product revenues, the majority of that is appliances.

More than 80%.

More than 80% of product revenues today is appliances.

Okay.

The second question is about the service part.

Given that service recognition is more rateable than products, when you see a decline in product revenues in two quarters, does it mean that service revenues decelerate, the growth decelerates after that?

A delayed impact, or does it?

Yes, I understand what you're saying.

Definitely, you see it already for the last two quarters, right?

You see, if you look at the revenue from services, you see that it's reducing every quarter slightly.

And, that's why I said that I expect that to continue.

Not only because if you don't have a growth in the product, then you don't get new attachments for the new product, but also because software blade growth is slowing down.

Still significant double digit, but slowing down.

Therefore, the total service growth is reducing over time.

Got it.

Are we going to have -- do you expect the next two quarters to get much worse because of the trends in product revenues over the last two quarters?

I'm just trying to understand if for the next two quarters we have a more substantial decline in service revenues or it's more smoother than what you see on the product side?

I expect product revenues to show more growth in the future quarters.

Yes, I agree.

Remember, the service line, Q1 can be sometimes similar to Q4 because Q4 enjoys typically a big portion of professional services and training and so on.

So, I don't expect anything dramatically different.

Got it.

Thank you.

Phillip Winslow, Credit Suisse.

Hi, thanks guys.

Just want to get a sense for what you're imbedding into your 2013 guidance for the blade growth.

Obviously, you talked about that, very helpful, just as you're looking into '13, how are you baking that in, in the context of the questions here related to obviously service growth and then unit growth?

So, as I said, we expect it to continue to be strong with double-digit growth.

Got it.

Then also, finally on the deferred line, I know you guys didn't talk a lot about this in terms of billings.

We've seen a little bit of a downside the past couple of quarters versus consensus.

How should we think about that ratio or that mix going forward into '13 versus what we saw in '12 and '11?

Thanks.

The growth of what, of the deferred revenues?

Deferred revenue, yes.

I said deferred revenues can fluctuate easily between quarters.

I don't have a better assumptions for you than similar growth to the revenue growth.

And also, remember the following, it typically goes down in Q1, goes down in Q2, goes down in Q3, then up in Q4.

I would keep it the same phenomena.

Perfect.

Thank you, guys.

Thank you.

Thank you very much.

Thank you for joining us, guys.

We'll talk to you soon, I'm sure.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.