Check Point Software Technologies Ltd (CHKP) 2013 Q1 法說會逐字稿

Greetings and welcome to the Check Point 2013 first-quarter financial results.

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

A brief question-and-answer session will follow our 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 begin.

Thank you, Jesse.

I'd like to think all of you for joining us today to discuss Check Point's financial results for the first quarter of 2013.

Joining me all 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 on our website and is being recorded for replay.

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

For your convenience the conference call replay will be available through April 29.

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

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

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

These forward-looking statements may include our expectations regarding demand for our security products, our expectations regarding the introduction of new products, programs and success of those products and programs, and our expectations regarding our business and financial outlook for the second quarter 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 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Because the 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 20F.

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 would like to thank you all for joining us today for a review of the first quarter of 2013.

Our revenues for the first quarter increased to $323 million and non-GAAP EPS was $0.79 representing a 7% growth over the same period last year.

Revenues were in the lower half of our guidance while EPS was towards the high end of our guidance.

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

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

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

In the first quarter revenues reached $322.7 million representing an increase of 3%, compared to $313 million in the first quarter of 2012.

Our software update, maintenance and subscription revenues reached $216 million, representing a growth of 7% year over year.

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

We continue to seek great success in our annuity blade, led by our threat prevention blade including application control, antivirus, URL, filtering and Anti-Bot.

Software blade revenues increased over 25% year over year.

Product and license revenues were $107 million, a decrease of 3% compared to the $110 million in the first quarter of 2012.

Our super high-end appliances, which are sold in small quantities, can fluctuate between quarters.

This quarter there was a $5 million decrease in a handful of super high-end deals compared to the same period last year.

As for the main enterprise product, a number of units reduced following a very strong double-digit growth in Q1 last year, average sales price increased and offset most of that effect.

Deferred revenues as of March 31, 2013 were $586.4 million, an increase of $44.1 million or 8% over March 31, 2012.

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

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

Transactions greater than $50,000 accounted for 67% of total order value compared to 60% in the same period last year.

We had 43 customers that each had transactions with a value greater than $1 million compared to 34 in the same period last year.

Our GAAP operating income was $177 million in the first quarter of 2013 with 55% margin, the same as the operating margin in the first quarter of last year.

Our non-GAAP operating margin this quarter continues to be strong with 59%.

GAAP net income for the first quarter of 2013 increased to $148 million from $143.6 million in the same period last year.

GAAP earnings per share increase to $0.73 from $0.68 per diluted share in the same period last year.

Non-GAAP net income for the quarter was $159.3 million or $0.79 per diluted share up from $156.9 or $0.74 per diluted share in the same period a year ago.

Non-GAAP earnings per share was towards the high end of our guidance representing 7% growth year over year.

Our cash balances reached $3.523 billion at the end of the quarter.

Our cash from operations this quarter was $331.4 million, an increase of 20% from $275 million in the first quarter a year ago.

This quarter we received a net refund from the tax authorities for previous years in the amount of $55 million.

Our DSO is at 78 days, an increase from the first quarter of 2012 as the quarter was back end loaded.

Our monthly DSO remained at the same levels as last year.

During the quarter we repurchased approximately 2.64 million shares for a total cost of $131.6 million.

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

Thank you, Tal.

I would like to thank everyone for joining us on the call today.

Tal has already addressed the financial results, now I would like to share some further information with you (technical difficulty) products.

If you will recall, we spoke about our intentions to raise the bar for security and provide additional layers of security during last quarter.

We followed up with (inaudible) intention with the introduction of two new software blades -- Threat Emulation and Compliance.

Threat Emulation is an exciting blade which addresses a very fast growing segment of the market place.

First (technical difficulty).

Ladies and gentlemen, please stand by, your conference will resume in just a few moments.

We are currently experiencing technical difficulties.

Again, please stand by.

Thank you.

Hello, this is Kip Meintzer.

Sorry about that, apparently we had a disconnection, so I'm going to turn it over to Gil here to start now.

Hi, everyone, and sorry about the interruption.

I will resume right at the beginning.

As I mentioned, Tal has already addressed the financial results, now I would like to share some further information with you regarding the business and our products.

As you will recall we spoke about our intention to continue to raise the bar for security and provide additional layers of security during the last quarter.

Following that would be the intention with the introduction of two new software blades -- Threat Emulation and Compliance.

Threat Emulation is an exciting blade which addresses the very fast growing segment of the marketplace.

First, Threat Emulation prevents infection from undiscovered exploits, zero-day and targeted attack.

This innovative solution quickly inspects suspicious documents by emulating how we run to discover malicious (inaudible) or prevent malware from entering the network.

Check Port Threat Emulation also immediately reports new threats over (inaudible) service and automatically shares the new information with our customers.

That Threat Emulation Software Blade further utilizes our cloud architecture and can be deployed as a cloud server with no capital investment or it's an [on-premise supplier].

The second solution we announced it is the Check Point Compliance Software Blade, which is designed to alleviate enterprise wide leaks by translating thousands of complex regulatory requirements into security best practices.

The new compliance solution constantly monitors policy configuration of Check Point Software Blade to provide actionable recommendations on more than 250 security best practices.

With those introduced new appliances we expanded our performance in the data center at a very high end with the 21700 appliance, 50% (technical difficulty) 110 gigabits per second compared to the performance of the 21000 series a year ago.

In addition, we launched a new family of appliances targeted at the lower end of the market, enterprise branch and remote offices.

With these new series, the 1100 series, customers can benefit from the Software Blade Architecture in a small form factor at a price point that starts under $1,000.

A testimony to our market leadership was delivered in the latest report from Gartner, IDC and NSS Labs.

According to IDC Worldwide 2012 Security Appliance Director, Check Point is recognized as the number one vendor in the worldwide firewall and UTM appliance market with the largest marketshare increase amongst all vendors.

We also received the great recognition for our product leadership in the NSS Labs benchmark producing the highest marks for a next-generation firewall and for IPS.

This further demonstrates our commitment to leadership in providing the best security to our customers.

This leadership coupled with new security innovation like our Anti-Bot and Threat Emulation Software Blade continue to raise the bar for security in our industry.

From a business and geographical perspective Europe produced good results while our SoftSpot was in a handful of super high-end deals in North America.

From a customer perspective we just held our annual customer and partner conference, Check Point Experience, in Barcelona.

This year we had a very high level of attendance and interest in the conference and we received very good ratings from the participants.

This week we are going to hold our US conference in Washington DC and we expect record level of attendance.

I hope this level of interest will be reflected in future wins.

This brings me to the financial outlook.

In all my regular caveats it is always hard to predict the future.

There are many factors that should weigh in.

Specifically for the second quarter we have a healthy forecast from our sales force, yet we have seen softness in a few markets in the first quarter and have taken that into consideration.

Therefore we will have a larger unusual range for this quarter.

For the second quarter we expect revenue in the range of $320 million to $350 million and non-GAAP earnings per share in the range of $0.76 to $0.84 per share.

GAAP EPS is expected to be approximately $0.08 less.

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

Thank you and sorry for the interruption (inaudible).

(Operator Instructions).

Sterling Auty, JPMorgan Chase.

On the couple of deals you mentioned in the super high-end, can you talk specifically, were those service provider related deals similar to the softness that we've seen by the FIs and the (inaudible) or were they enterprise deals?

They were mainly enterprise deals and they were mainly a tough compare to last year because last year we had some -- one or two exceptionally large deals that we won.

And this year we actually have a nice pipeline that can also work through that, but we do tend to shift and fluctuate between quarters and unfortunately that is the main change in product sales this quarter compared to Q1 last year.

Okay, and I think the other --.

(multiple speakers) competitively related, no, I don't think that any of these deals -- all these deals that are now are still open.

And I think that part of the market is currently not very competitive, at least the deals we are seeing.

Okay, and then I think the other topic that everyone has been asking about for the last couple of quarters is the timing or potential of return to growth for the product and license revenue line given the growth in revenue plus change in deferred and the guidance outlook, how should we think about the product and license revenue line for the June quarter?

Should it be flat, down or up year over year?

I think we provided a wide range so it can be any of the above.

I think that we are looking for a reduction of growth in that line and I think it is expected more towards the second half of the year and the last part of the year.

Keep in mind with most of our new innovation and new security technology are Software Blades that are accounted in the services line because they are a huge revenue.

And the software blades are actually growing very nicely in quantity, in revenues, in all the right measures.

And this quarter I think Tal spoke about 25% increase in Software Blade revenues and I think that is pretty consistent for actually the last few quarters.

So I think a lot of the new innovation and the new products and technologies that we are launching are falling in the different line on the P&L but help a little bit the growth.

Okay, thank you.

Shaul Eyal, Oppenheimer & Co.

Tal, a quick question for you on some of the comments you made.

I think you indicated obviously that the super high-end appliances came short $5 million, but however the ASP has increased on the smaller (inaudible) appliances.

Is that a metric you will be starting kind of to disclose and share with us on a quarterly basis?

And again, kind of what was the cause of the softness?

Was it just kind of seasonality or just (inaudible) the tough year-over-year compares?

Just to clarify, when we say super high-end, basically it means relating to the 61,070.

As you know, it is only a one and a half year product, it typically sells a few units, it is not hundreds of units.

Therefore if you have five or six deals in a certain quarter and you get four in another quarter you get eight deals that's the difference.

And Q1 last year was very, very strong.

If you remember we reported that was the first quarter that was eight digits.

So $5 million out of it was quite significant in the total product booking but it's in one or two transactions.

So I wouldn't read too much into that except for the fact that we sold less super high-end deals, that's it.

When it comes to the rest of the appliances I said two things we saw.

Remember -- just a reminder that in Q1 last year our number of units increased over 20%, so that was a very tough compare going into Q1.

And we see a decreasing number of units while we see a very healthy growth in the (inaudible) which compensated for that decrease.

Thank you for that.

And a question on the deferred revenue.

Obviously a strong metric this quarter.

What was it driven by?

Was it just on a renewals product -- what is in there?

I think the software blades there is more services.

I think all have contributed to the deferred revenues.

The revenues mainly -- remember, the majority of that number is the update in maintenance, which we had good renewals, we keep our steady renewal rate as it was for many years so we have great renewal rates.

And the Software Blades continue to increase that as well.

So that is the main two factors.

Thank you for that.

Michael Turits, Raymond James Financial.

A couple of questions.

First, I think you said, Gil, that you saw some softness in the market that was causing you to give the wide range.

Anything more specific you can talk about that and especially how you might be thinking about the full year guide?

I know it is early, but you didn't give an update on that.

And then I have a follow-up.

I think we see around us several companies that have published results and seen some weakness in the first quarter.

I think from our perspective, as I said, I mean we are seeing a nice growth in the European markets for the past two quarters.

In the US I think we have a mixed picture.

In some places we had great success and we sold many deals specifically to the small number of super high-end deals, that is where we have seen the main shortage.

And again, our efforts right now is quite optimistic and we have a very strong forecast.

Yet on the same time I would like to balance that with what we are seeing here around that in the marketplace and with other companies.

So that is why we aren't providing the wide range and I think it is really, really (inaudible).

Okay.

Sort of a -- and any thoughts on where you are in terms of the full-year guide, any change to that range at this point?

Well, we couldn't hear you, (multiple speakers).

Could you repeat the question?

Yes, any chance your thoughts on the full-year guidance range that you gave last quarter at this point?

I think it is a little early to look at that.

I think we will give it another quarter or two and figure out how we change that.

If I can get one follow-up also, separate subject.

Last quarter you reported a slight improvement in the renewal rates on blades, both bundled blades and a la carte blades.

Did that improvement hold?

Where is that at this point?

Pretty much in the same area.

You know, it is slightly above 60% for the unbundled and slightly higher than or around 40% in the bundled which is a great number.

Okay, thanks, guys.

Brad Zelnick, Macquarie.

Gil, I have a bigger picture question about the future of network security.

With an increasingly mobile and virtual workforce and the proliferation of cloud services, how does network security architecture remain relevant in the future?

Because most of us work in banks where everything flows through the corporate network.

But many less regulated industries have employees that spend their entire day accessing salesforce.com, Gmail and Box over public networks and never even touch a corporate network.

Thanks.

First, it is an excellent subject and I think it is -- with the combination of different elements that needs to be secured.

Most companies I know of or all companies I know of still have a corporate network and still have a data center that they need to defend.

On top of that a virtualized server that can be protected because they want to use public cloud services, but that still can and needs to be secured and we have several products in the virtualization area and in the public cloud.

And you are speaking about software as a service kind of services like Gmail and salesforce.com and others, these are more difficult to secure, but there are still some technologies that can be used.

They are more difficult to secure because by definition you use a shared infrastructure and you use an application that share demands multiple (inaudible).

But even (inaudible) a few ideas about securing that.

And by the way, some of that around mobility and data security these are definitely areas we are working on and these are areas that will show some nice innovation during the rest of the year.

So this is clearly an area that we are working on.

Overall I haven't seen any companies that sort of moved from securing their data centers or their infrastructure, quite the contrary.

I mean the cyber security risks are getting higher and companies -- as much as they leverage some software as a service cloud services, they are still having a pretty -- in the enterprise space they still have very serious data centers and corporate offices that they need to defend.

Thanks for the color, Gil, and if I can just ask a quick follow-up of Tal.

Tal, the cash flows this quarter benefited from a $65 million sequential change in trade payables and other accrued liabilities.

Can you just walk us through -- is that related to the tax -- the cash tax payment that you received?

Yes.

So I said we had all -- net -- net means we received from the tax authorities and we paid for the tax authorities for previous years.

In total the net amount was above $50 million, around $55 million and that obviously reduced the AP.

Or sorry, increased the AP -- yes, increased the AP because the net resulted in increase of the AP of the tax payable, right, because it was netted before.

So you had a cash benefit of around $55 million in our operating cash flow.

Understood.

Thank you very much.

Rob Owens, Pacific Crest Securities.

I was wondering if you could talk a little bit about your trends and blade attach rates.

And I think there is this expectation of product revenue growth in the second half of the year.

But I'm just wondering what you are seeing overall for these blade attach rates and if that could put pressure on the second half of your attach rates increase?

Thanks.

I don't know why -- more blades should not put too much pressure on the product, but we are seeing changes in the blades and we are seeing very positive changes.

So some of them are driven by different packages that we provide to customers, but overall we see that blade sales are going very, very well, nice increases in all blades both in (inaudible) in revenues, nice renewal rates and that's I think overall a very positive picture when we analyze the data about the blade.

And that is true for all the blades -- for the IPS, for the application control, for the antivirus, for the URL filtering, for the Anti-Bot -- all these blades are doing quite well, showing high growth rates and I think we are very pleased with that from both the blades that are bundled review products and mainly for the unbundled blade roles that customers either buy a la carte or renew from previous years.

Is there -- Tal, is there any kind of quantification you can provide in terms of what your blade attach rate looks like now versus a year ago?

You mean the renewal rates or the percentage of the Software Blade out of the product?

I am not sure I understand the attach rate in this regard.

Yes, the latter part of that question.

Yes, so actually it increased -- it's increasing about 2%, which means it has hit my product growth this quarter as well, but -- and moved it into the services, but I didn't want to give three explanations for the product weakness, so I thought one is enough.

But your question is we see more attacks so it is slightly ahead of that and better in the future hopefully.

Bear in mind that the fact that the renewal rates are between 40% to 60% that it's a heavier (inaudible) as the number is growing up.

So it's balance is there.

But I can say that when you look at the unbundled we see a very high growth rate there, obviously higher than the bundle because the bundle is somewhat related to the growth of the product while the unbundled is customers that are choosing freely to renew or buy a new blade.

And there the numbers are growing faster than the bundle, which is great news.

And we see that growth in application control, in antivirus, in URL filtering, even Anti-Bot, although small numbers, very high growth rates.

And I think it presents a high potential to the addressable market is quite large.

Obviously the number becoming bigger than the growth rates are slowing down just by the (inaudible), right.

Great, thank you.

Walter Pritchard, Citigroup.

Tal, I'm wondering on the OpEx side, it looks like you did see a faster growth rate here in OpEx on a year-over-year basis versus what you have seen for a while, especially the last 12 months.

And I am wondering if you could maybe give us a head count number and talk about what drove the OpEx?

Sure, so we talked about already in Q3 and in Q4 we said we increased our headcount in R&D and in sales and you see that obviously in the numbers fully in Q1.

Another one, remember that the dollar is working against us because there we have about 40% of our expenses are in local currencies that are different from the dollar.

And as the dollar got weaker than our expenses translated into dollar increase and we see that effect in Q1 and probably for the rest of the year.

So that increases the level of our expenses.

And, Tal, how much was the expense in (inaudible) currency on a year-over-year basis?

Expenses?

I couldn't hear -- the expenses what?

I was just asking you to quantify that part on the FX impact on OpEx, how much (multiple speakers)?

The majority of the increase actually came from the increase in the head count and the expenses, the dollar probably around $2 million or so.

Okay.

And then just, Tal, on buybacks, it looks like your buyback is up from where it was year over year, but if I look at where it was in Q3 and Q4 it was much higher.

And I am wondering if you could talk about why it ticked down.

And then just maybe bigger picture, the Company now has, by my math, about 39% of its market cap in cash and certainly highest in the peer group that I cover.

And I am just wondering what the rationale is for not moving that buy back up substantially versus where it is right now.

Sure.

So, first, we will talk about the number of the buy backs, we said about $1 billion in two years, so it is about $125 million average a quarter.

If I recall it was around $132 million so it is still above the average expected.

The total should be around $1 billion.

So you see the numbers make sense.

Also bear in mind that in most of this period we don't control the (inaudible) because it is blind plan that is purchased by a program that we set before we get into the quite period.

So it obviously can depend on the execution of the bank that is doing the buy back.

Got it, okay, thank you.

Aaron Schwartz, Jefferies & Company.

I just had a follow-up question on the deferred revenue.

Your module typically sees a drawdown through the first three quarters of the year and then you sort of refresh that in Q4.

With the building Software Blade business and that starting to contribute to deferred would you expect any changing pattern in that going forward?

The material change was probably a year and a half or two years ago, we just started building the Software Blade into the deferred revenue.

Now you see the growth of the Software Blade is not in 70% to 80%, it's around 25% so it is not that of a big effect.

And I would expect to see the same phenomenal reduction in deferred in Q1, Q2, Q3 and then an increase in Q4.

Obviously it can have some fluctuation, depend on the timing of customers.

This quarter it is reducing about 1% which is in line with the expected Q1 seasonality.

Keep in mind that many large customers like to have an annual renewal, we allow them to new over a subscription and services at once.

So it is up to the customer choice but and we allow them to align that anyway they want.

So that is how it will work.

And again, there are still many customers that renew or subscription and services throughout the year.

So on the blades, I know you've got the bundled and unbundled, it seems like the bundled are maybe more part of the renewal portfolio.

Are the unbundled blades just smaller in percent of your total blade mix?

Actually the opposite, the unbundled already is majority it is more than 50% of the total Software Blade which is why we are excited about the Software Blade because the unbundled -- please remember the definition of unbundled means a customer that buys a new blade or that renews from his free will the second year.

So the total is over 50% now, the majority is what we call the unbundled at this point of time.

Okay, but wouldn't the unbundled be less linear than your Q4 renewals?

It can be, but again it depends on how the customer wants it.

If the customer can buy a new blade let's say now we are now the Threat Emulation and a few hundred customers buy the Threat Emulation in Q2 this will be the second quarter.

However, many cases where the customer will do when the renewal for their entire account will arrive in December or in October they will just align the whole account and will continue to renew the full account on Q4.

So yes, it can have a (inaudible), but not a huge effect.

Okay, terrific.

Thanks.

Tal Liani, Bank of America-Merrill Lynch.

I hope you can hear me okay.

I have a few small questions.

First is what was the unit growth and the ASP?

I'm interested to see -- last quarter I think you said the ASP stabilized and I just wanted to see if the big deals -- or the push out had any impacts on the ASPs?

The second question related to that is you said last quarter that 90% of the appliances sold in the quarter were of the new appliances.

Can you give us an update of how was it this quarter?

And then I have one follow-up.

I think it is way above 90%.

That is why I stopped providing that.

Majority of our appliances that are sold every quarter now is the new product family, starting with the 2200 all the way up to the 61000.

So say still above 90%.

Actually don't have the exact number in front of me, but it is well above the 90%.

And then the second question is we related to it in the beginning of the call that actually Q1 last year, we had the growth of over 20% in number of units.

This quarter we saw a reduction in number of new units based on this tough compare, but an increase in this business mostly offset each other.

Got it.

So my follow-up question is just to understand, trying to break down services between the service revenue, the subscription part and everything else.

And you provided a lot of details in the last few quarters on what is the proportion of blades of software as part of services, et cetera.

And what I -- when I'm backing out the subscription part, it looks like the growth rate is decelerating in line with what happened to revenues over the last year.

So I can only do it on annual basis, but it looks like the growth of subscription is decelerating to mid-single digits.

You don't disclose it, but can you give us some estimation qualitatively of how subscription trends and the correlation between product revenues and subscription revenues?

Thanks.

Sure, we talked about it -- we talked about it as well that about 20% of our service revenues are the subscription.

And when you calculate the number, then you are right, the growth of the (inaudible) and Internet is in -- somewhere in the single digits, sometimes lower, sometimes higher.

But (inaudible) it's always been in those rates, typically can be in the mid-single-digits.

So what else is in services?

Can you -- if 20% is subscription what are the other big buckets?

Update and maintenance, that is the main other item.

You also obviously have some small items relating to professional services that can fluctuate between quarters, training and so on.

Okay, I'll take it off-line.

I want to understand what happened in update and maintenance as well.

But I will take it off-line.

Sure, sure.

Shebly Seyrafi, FBN Securities.

So you said a year ago you had strength in super high-end deals.

Did you also have strength in the second quarter of 2012 as well?

Are we going to have a difficult comparison again?

And I guess related to this is it is interesting that your ASP -- well, no, let's start there.

Just start with the second quarter last year, was the super high-end strong then?

Pretty strong, yes.

Okay.

And so, I am just trying to get a handle on when your product revenue growth may start to go positive again.

It looks like you are going to have another difficult comparison again in the second quarter, your guidance suggests this as well.

But you are going to have easier comparisons in the back half.

So I guess maybe you can talk about when you think product revenue growth can go positive and what are the key factors that will get you there?

I think clearly in the second half of the year we are going -- we expect to see more product growth.

I think there is many opportunities and a lot of upside every quarter, but I think in the -- we are expecting towards the year end.

I don't know, Tal, if you want to add anything?

Yes.

I think you are right in the following sense.

If you look at the previous quarters, Q1, Q2, Q3 and Q4 last year, you will see very clearly that in the beginning, the first half of the year was a very, very high, unusual growth in number of units where typically in Q1 and Q2 it grew over 20% in double-digit growth as we reported.

So that makes it a very tough compare.

When we look at it to the second half of the year it came back to the regular growth rate and therefore I think it is more a fair comparison during the second half of the year and that is where I think we expect it in the second half of the year.

Having said that I will take into account general macro economics on the one hand and on the other hand opportunities that will be in front of us.

And that is how we provided a bigger range and we said we were looking to that guide -- annual guidance after we see Q2 results.

Last one for me.

I just think that the ASP change year to year, which went positive the last two quarters I guess, will continue to stay positive and increase as the year progresses?

It has actually increased nicely this quarter.

The effect is, by the way, not as a result of prices going up or prices going down, but the mix shift.

So if we sell more mid to high-end appliances then the ASP is going up and that is what we've seen in Q1 and also in Q2 which is a good phenomenon.

The results should be that the multiple of the number of units (inaudible) should increase in dollars, and that's hopefully what we will start seeing in the second half of the year.

Okay, thanks.

Gregg Moscowitz, Cowen and Company.

There have been a couple questions on deferred revenues and the strength around that.

Although if you kind of look sort of within the numbers, short-term deferred revenue did decline sequentially as we usually see, but long-term deferred revenues actually had a pretty nice increase and I don't think we have ever seen that before in a Q1.

So just was wondering why was there a mix shift to long-term deferred revenue in this quarter?

I say it's every quarter in the long-term.

Long-term is sometimes the customer just decides to take a service instead of one year to two years.

And then it includes in the long-term contract and therefore in the long-term deferred revenue, this can happen in any quarter.

Typically we see much more in this type of increase in Q4, as you said.

Last year we actually saw a lot of it also in Q3.

And this year we've seen some of it in Q1.

It pretty much can happen in any quarter.

That is why I look -- when I told to the minus 1% in deferred revenues, I looked only on the short-term because the short-term is a reflection of the run rate and it was as expected in the short-term as well.

Okay, thanks.

And then, Tal, just a follow-up on the ASP and unit commentary in terms of ASPs being up year over year and units down.

I was curious if you saw any big differences in either unit or ASP growth if you were looking at Europe as compared with North America?

I don't recall actually.

I think maybe Europe was stronger than the US in general.

Okay, and then just finally for Gil.

You mentioned, Gil, the 11000 appliance series, it is targeting a bit of a new market for you or a new market segment for you I should say.

Is this something which you think over time can be a material contributor for Check Point?

How are you sort of viewing this appliance?

First I think it is a very exciting market for us.

We had product in that marketplace, a new Tier 1H for a long time, but that product line was probably about eight year or eight or nine years old.

So I think it is a great time and it is probably long do to renew that line.

I think that can reenergize, I mean the last two years I think we had some lack of focus and in the (inaudible) market of branch offices and I think that completely reenergized (inaudible) market segment of going into multi-size installations where customers have hundreds and thousands of different branches where we secure them all and I think that is a very exciting market on the enterprise space.

Okay, thank you very much.

Daniel Ives, FBR Capital Markets.

Just two questions.

One, on those high-end deals that pushed, those are obviously installed base deals.

But I just wanted to ask if there are any competitive dynamics or any new guys in those bake-offs that you saw.

No, I don't think that there was any new competitors, our market is competitive and always been competitive, specifically on the super high-end deals, I don't think that you are under any competitive pressure because clearly (inaudible) of lumpy business with small number of larger deals.

Okay.

And when you talk about sales pipeline being obviously strong, I mean just compare that anecdotally to what we have seen over the last three or four quarters.

I mean it has been kind of a transitional period for you guys.

I mean is this the best you have felt that you have seen from the channel?

Or maybe you can just talk about that relative to what we have seen on the last three, four quarters.

I think that we have a healthy pipeline right now.

But again, I mean I would warrant that healthy pipeline combined with other numbers that are not in the general economy and what we have seen in other sectors of the technology warrant that we have a wide range.

If all the pipeline matures then I think we have excellent outlook.

But again, not always what is happening.

Okay, thanks.

Phil Winslow, Credit Suisse.

First, Gil, wondering if you can provide some more color, just what you did see geographically and how you are kind of thinking about what you are going to see there for Q2 in terms of the pipeline?

And then also just want to make sure -- so you guys are just maintaining simply the full-year guidance and then I expect an update at some point in the future?

Thanks.

From a geographical standpoint we have, as I said, a very good forecast for the Americas and I think we also expect to see a healthy second-quarter.

These are the main two ones.

And as for the rest of the year I think we will see after Q2 if it needs to be revised or not if it's -- I think we will wait and see.

Got it.

Thanks, guys.

Rick Sherlund, Nomura Securities.

Gil, on Threat Emulation, that seems to be a popular area right now.

I wonder if you could just give us a little more color on the interest levels you are seeing in that.

And then maybe competitively what kind of win rate you are experiencing versus maybe FireEye in that market.

First one is (inaudible) so I can't speak about (inaudible) rates and demand yet, we just announced it a few weeks ago and it's very, very new.

In terms of how our solution is different, first I think our immediate competitors both have something comparable to it.

And I think the unique value that we provide in the Threat Emulation space is the fact that it is all integrated into one system and the fact that we actually have prevention.

If you look at many other Emulation kinds of solutions, they analyze the file pretty much off-line and if there is a threat found then manually someone has to go and look for the file.

What we have is a real-time in-line system, you get an e-mail, if the e-mail is unknown, if the e-mail is not recognized --.

By the way, the threats that we are focusing on is the threats that -- I don't know how well you are aware of it, but these threats that arrived in war documents and (inaudible) file and presentation and Excel files, in all type of documents we received.

We open a document, it can look completely innocent and while the document is opening it also installs the malware inside our computers, sometimes aborts, it can communicate with the operator and so on.

So these threats are really serious threats and really ones that can come by to everyone.

What we will to is we will take that e-mail, send it to the Threat Emulation engine, the threat Emulation engine, by the way, can be a cloud service that we provide or it can be an appliance that a large enterprise would like to install locally.

It runs the document in the sandbox, looks for the different behavior and then it either tells the main system (inaudible) the e-mail, nothing was found or it tells the e-mail something was found, stop the e-mail, don't transfer that, and that is a very, very powerful thing.

Again, none of the other competitors has a real-time system like that.

And I think it is, at least for people I spoke to, to receive a high level of interest.

Great, and Tal, the software updates, maintenance and subscription declined sequentially.

It's unusual that we would see annuity revenues declining sequentially.

Is there some other portion, Professional Services or something that might account for that?

Yes, there might have been, services typically -- you're talking sequentially because Q4 and Q1.

That actually happened I think two or three years ago as well.

It relates to what you said, many times professional services and training coming in Q4 and then reducing in Q1.

So we had that offer two or three years ago and we had it as well this quarter.

And just any macro perspective you have talked about the security market in Europe particular, but have you sensed anything from a macroeconomic perspective that is changing in terms of budgets or the effects of world events is having an effect on IT spending in general?

I think we see it (inaudible) for a long time that's there is pressure on customers' budgets.

On the other hand, I think that when customers understand the importance of cyber security it also receives a good priority.

And let's remember, it is also a small portion of the IT budget in most companies -- a tiny portion.

So I think overall, yes, we see a pressure from the different economies.

And on the same time I think the opportunity is there and there's still a lot less to our execution and our general marketplace, so there is definitely an opportunity for us to do better.

And I would just add that in general I don't think that any market is immune to macroeconomic including the security, so it is not immune.

I mean we know that Europe was slow for a few quarters last year and the year before and Q4 and also this quarter they are getting stronger.

And this quarter it was quite a good quarter for Europe, it was positive both in product and in services.

So maybe it is an indication that the environment there is improving or maybe just some quarters are better than the others.

So I don't know how much to read into it.

All I know is that we should be cautious.

Yes, thank you.

Robert Breza, RBC Capital Markets.

Just, Tal, as you think about your hiring plans for the rest of the year how do you think from a capital expense perspective we should think about hiring and how do you plan to go into this next year just from a sales force hiring perspective?

Thanks.

So we expect to continue and hire.

I think there are some places that I think that we should hire more aggressively and invest more in sales.

I think in some areas I clearly see that if we invest more in people on the street in approaching new opportunities and new account we'll get new wins.

And I think we (inaudible) early and we plan to accelerate hiring.

Overall I think we are planning for modest growth in headcount and we will continue to execute on that.

Maybe as a follow-up, Gil, do you think we should start to see year-on-year product growth here in Q3 or Q4?

How do we think about the year-on-year product license for (inaudible) or is the subscription growth in blades more important to be focused on?

Thanks.

I think Q3 or Q4, yes, that is what we are shooting for.

And I think we have already spoke about that in an answer to a previous questions.

They are (inaudible) different opportunity.

Right now realistically I think it's Q3-Q4, there is also some upside in Q2.

And I'll repeat what I said last quarter and the quarter before.

I mean, just mathematically, because we can't predict the future, but mathematically we knew that as we go into Q1 and Q2 this is tough compares and Q3 and Q4 it's more fair compares in terms of the number of the units and which enable us to hopefully see increase in the products.

Great.

Thank you very much.

Jonathan Ho, William Blair.

Can you just give us a quick update on the trade down effect?

I think you guys said in prior quarters that you were seeing that now swing back in your favor.

And perhaps with an increasing number of Software Blades that people are up-taking, are they seeing that need to then swing back up into the prior I guess before the update or refresh that you guys went through?

So I think in the last quarter we have seen in the uptake in the ASP and that's also in the mix of products.

So last quarter customers bought more higher end and enterprise product and less mid-size product, the opposite of what we had a year ago.

Which I think it can be starting to stabilize and people start to see the value and the power they need to run all the software blades and the additional security that they want.

And are you guys seeing anything in terms of specific market verticals, any weakness in any of those or any particular strength?

We didn't see any material change in any of the verticals.

Great, thank you.

Operator?

Brent Thill, UBS.

Tal, just to follow-up on the ASP, can you quantify the improvement year over year or sequentially?

In the ASP?

I didn't provide it.

I didn't quantify.

What I said is the number of units went down but the ASP moved up.

Yes, and that is why I was asking.

Is there any color in terms of the year-over-year growth?

I didn't provide it, no, so I wouldn't like to provide more of that, because -- and the reason is because I think now we get into the plan that we should see the top end product booking increasing toward the end of the year and it is not about how many you can increase and how much of the ASP increase.

But comparing quarters 1%, 2%, 3%, it was more.

We've seen a nice growth in the ASP.

Okay.

So it really just comes down to units in your perspective that the ASPs would stay stable from what you see going forward?

No, it is actually and that is the reason why I was not providing more information (inaudible) wasn't there.

Because in reality what happened and we had that before as well.

Many times number of unit change in ASP change is very natural because every quarter you can see some different mix.

The only thing that we ask you, it was unique and that is why last year I provided it every quarter is that because we launch this new product line we've seen a huge shift in number of units and a huge reduction in the average ASP as a result of this mix shift.

Going into this year we should go back into a normal universe where we should look at the (inaudible) growth, (inaudible) number of units and ASP per quarter.

Okay, thanks for the color.

And, Gil, real quick, anything unusual you are seeing in channel discounting or incentives that are being put forth by your competitors?

No, nothing special.

Again, we have a competitive market.

I think our competitors are working very, very hard.

And I think we are also working hard and trying to grow and consolidate the marketplace and provide more solutions to the customer and focus on the customer.

I think we have seen some positive changes in many channels.

And I hope that will be reflected in the future.

Thank you.

Thank you.

Ladies and gentlemen, we have reached the end of our Q&A session.

At this time I would like to turn the floor back over to management for any concluding remarks.

Thank you very much for everybody joining us.

I apologize for the little issue we had with connectivity today, but technology, sometimes it just doesn't work.

So with that I would like to say thank you and look forward to speaking to you guys in the coming quarter.

Take care.

Bye-bye.

Thank you.

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

You may disconnect your lines at this time.

Thank you for your participation.