Check Point Software Technologies Ltd (CHKP) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Check Point Software second quarter 2013 financial results conference call.

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

A brief question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Kip Meintzer, head of global Investor Relations for Check Point Software Technologies.

Thank you.

Mr. Meintzer, you may now begin.

Thank you, Jessie.

I would like to thank all of you for joining us today to discuss Check Point's financial results for the second quarter of 2013.

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 on our website and is being recorded for replay.

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

The conference call replay will be available through July 25.

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

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

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

These forward-looking statements may include our expectations regarding demand for our security products, our expectations regarding the introduction of new products and programs and the success of those products and programs, and our expectations regarding our business and financial outlook for the third 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 and 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 filed on Form 20-F.

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

In our press release, which has been posted on our website, we present GAAP to 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 would like to turn the call over to Check Point's Chief Financial Officer, Tal Payne, for a review of the financial results.

Thank you, Kip, and hello, everyone.

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

Our revenues for the second quarter increased to $340 million, representing a 4% growth over the same period last year, and towards the higher end of our guidance.

Non-GAAP EPS was $0.83, representing an 8% growth over the same period last year, and at the top of our guidance.

Before I proceed further into the numbers, let me remind you that our second quarter GAAP financial results include noncash stock-based compensation charges, amortization of acquired intangible assets, and the related tax effects.

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

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

In the second quarter, revenues reached $340.2 million, representing an increase of 4%, compared to $328.6 million in the second quarter of 2012.

Product and license revenues were $120.8 million, compared to $123 million last year.

Sequentially, we had a strong increase of 13%, coming mainly from our higher-end products and data center.

Our software update, maintenance and subscription revenues reached $219 million, representing a growth of 7% year-over-year.

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

We continue to see great success in our annuity blades, led by our Intrusion Prevention blades and threat prevention blades, including Application Control and Anti-Bot.

Deferred revenues as of June 30, 2013 were $580.4 million, an increase of $43.8 million, or 8% over June 30, 2012.

Sequentially, we had 1% decrease, as seasonally expected.

Revenue distribution by geography for the quarter was as follows-- Americas contributed 47% of revenues; Europe with 37%; and Asia-Pacific, Japan, Middle East and Africa region contributed the remaining 16%.

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

Transactions greater than $50,000 accounted for 68% of total order value compared to 66% in the same period last year.

We had 41 customers that each had transactions with a value greater than $1 million compared to 40 in the same period last year.

Our non-GAAP operating margin this quarter continues to be strong, at 58%.

GAAP net income for the second quarter of 2013 increased to $151 million from $150 million last year.

Capital earnings per share increased to $0.76 from $0.71 per diluted share in the same period last year.

Non-GAAP net income for the quarter was $165 million, or $0.83 per diluted share, up from $161.8 million, or $0.77 per diluted share in the same period last year.

Non-GAAP earnings per share were towards the top end of our guidance, representing 8% growth year-over-year.

Our cash balances reached $3.571 billion at the end of the quarter.

Our cash from operations this quarter was $204.7 million, an increase of 30% from $157.5 million in the second quarter a year ago.

We had very strong collections from customers resulting in our DSO, days outstanding, reducing to 71 days from 78 days in the first quarter of 2013.

During the quarter, we repurchased approximately 2.9 million shares for a total cost of $143 million.

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

Thank you, Tal.

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

Tal reviewed the financial results.

Now I would like to provide some further information to you about our business and products.

The second quarter was a very good one.

We've seen an impressive increase in business volumes in the second quarter compared to the first one.

While the first quarter had decent results, with soft growth, the second quarter provided a very healthy upswing in business volume.

The main frame came from two areas, the North American sales organization, and data center solutions.

In North America, we saw a very healthy increase in business activity, with the biggest jump in new product sales.

This is always encouraging, as the US market is the largest, most sophisticated and competitive market in the world.

Europe provided solid results this quarter.

However, we did experience some softness in Asia, partly as a result of severe currency change which occurred in the past year.

In particular, in Japan, there was a devaluation of 23% in currency resulting in reduction to our dollar revenues.

On the Appliance side, over the last few months, we've continued to increase the performance of our data center Appliances, with the introduction of new 21000 series model, the 21600 at the end of 2012, and 21700 at the beginning of 2013, and the 13500 model we just introduced yesterday.

The 21000 series has provided stellar results this quarter with high growth in both units and dollars.

Once again, this is encouraging, since this is the most lucrative segment of our industry.

Furthermore, it demonstrates the need of customers to utilize more power as they turn on additional layers of security and purchase new software blades.

On the other side of the product spectrum, we released a new series of products.

These low-end products complete the product transition and unification we executed last year, and utilized the new embedded GAiA secure operating system.

The 1100 series Appliances targeted the branch offices opens many opportunities for large scale deployment in various industries, such as retail, industrial applications and more.

The 600 series is targeted to small businesses.

It includes a new web user interface that enables the users to run the device with no dedicated IT staff, and it is priced very attractively with prices ranging from $400 to $1200.

Both these products are off to a good start, with healthy sales.

The superiority of the 600 series technology and value was demonstrated by a recent Network World review, in which our 640 model received an excellent score of 4.7 out of 5, compared to mediocre scores of 3 to 3.5 for seven other competitors.

This is a huge lead, especially in this market segment.

We are proud of this achievement and look to invest more in sales and marketing in these market segments.

We've also had good amount of marketing activities this quarter.

We held our two largest Check Point Experience customer and partner conferences that enjoyed a very healthy level of attendees.

In the US conference, we realized the jump of almost 50% in number of participants.

Hopefully, this increased interest will lead to higher levels of investment in cyber security.

So overall, I am very pleased with the business activity and results we experienced in the second quarter.

With that said, this brings me to the financial outlook.

You know my regular caveat.

It is always hard to predict the future.

There are many factors that could point to better results, and there are many reasons to be cautious.

I would now like to provide you our projections for the third quarter and update our annual projection based on the first half results.

For the third quarter, revenues are expected to be in the range of $330 million to $350 million, and non-GAAP EPS in the range of $0.80 to $0.86.

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

For the full year, revenues are expected to be in the range of $1.360 billion to $1.410 billion, and non-GAAP EPS in the range of $3.33 to $3.46.

GAAP EPS is expected to be approximately $0.27 less than that.

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.

(Operator Instructions)

Michael Turits, Raymond James.

Hey, guys.

Two questions.

Obviously, you beat a little bit here, but you did lower on the back half.

This would be lower for the year.

What are your thoughts on the back half?

And then also, can you talk a little bit about Blades?

What were the renewal rates for both bundled and unbundled and maybe what the growth rates are?

First, let's start with our projection moving forward.

I think we've basically adjusted our ranges based on the first half results.

I do expect a healthy second half.

And actually if you look at the numbers, you can see that our earnings per share target, or midpoint remains the same as it was six months ago, when we first gave the projections for the year.

We've actually narrowed a little bit the range from $3 --

$3.30.

[$3.30] to $3.33 and to $3.46.

The midpoint is actually in the same place.

So we saw -- overall I would like to think that we'll see with business volumes continue to pick up like we've seen in the second quarter, but I would also like to be cautious and adjust the annual numbers to the first half results.

Yes, and--

So again -- go ahead.

Sorry.

And I would look -- sequentially, you see that we still mean that we will have reasonable growth and healthy growth sequentially, as we typically see between Q3 and Q4.

When we talk about your question to the renewal rate, I'll remind you that these renewal rates can shift easily because people can move from regular Blades to packages, and so on, they can buy new ones.

The rates remain the same like in previous quarters, but I wouldn't make that as a specific guidance that we provide every quarter.

Can you tell us anything about Blade revenues, annuity Blade revenues maybe as a percentage of total revenues or a percentage of service revenues or the growth rate?

Yes, revenues picked up more than 25% this quarter.

So the growth year-over-year was above 25%, probably as a percentage of the update maintenance subscription, over 20%.

I don't know if it was -- I don't remember if it was 21% or 23%, but you have all the numbers.

You can calculate them.

Okay.

Thanks very much, guys.

Thank you.

Shelby Seyrafi, FBN Securities.

Thank you very much.

Can you talk about the unit growth in the last quarter and the ASP change?

And separately, when do you expect product revenue to go positive?

Do you expect it to go positive this quarter?

I'll remind you, Q3 usually, if you look at the last four years, I think most years except for one typically, typically product booking and revenues in Q3 are slightly below Q2, and it can be obviously a few million more, a few million less, but it's the same range.

And services increase typically in a few million.

So the run rate continues.

And that's how you can see our guidance.

You can see that where we are in the midpoint and so on.

So when you look -- I don't expect that to change in this Q3, because that's the regular Q3 phenomena, where half of the world is taking vacation.

So there's nothing new there.

Q4, we expect to see growth in the products, and you can see it in the range of the guidance and in the midpoint that we provided.

On the unit ASP changes?

So when we looked sequentially, everything grew, the units, and the experience was very healthy from both perspectives.

Year-over-year, in units, we do slightly an ASP increase.

Its the same phenomenon we saw in Q4 and Q1, it's continuing in Q2, which is great, and now we are starting to see number of units basically stabilize, and hopefully we'll start to see growth going forward.

Okay.

Thanks.

Thank you.

Shaul Eyal, Oppenheimer and Company.

Good morning, everybody.

Couple of quick question on my end.

In the press release, you specifically indicate the app control and the flood prevention blade, really including some kind of good growth.

Can you provide us with some kind of more granularity on that front, and what way the app control might be different than other competing products out there, and what about threat prevention at this point?

Gil will relate to the product.

In terms of the numbers, our top Blade remains Intrusion Prevention, which has been there for a while.

It's still growing in double digits, which is very nice to see, although it's been there since mid-2009.

Application Control is our number two blade, doing great with strong double-digit growth as well.

Both, by the way, bundled and unbundled.

When we speak in unbundled, it means that customers are buying it from their own free will and continue to grow, and it's great to see, which allows us to see growth of over 25% in our subscription and Annuity blade revenues, which is great.

So that's why I mentioned those.

Anti-Bot is a pretty new one, it's small numbers, but we've still seen a very nice increase in the right direction, [a few hundreds] of percentage, but it was a small number.

But it's a nice number because it's not [$500,000] or [$1 million] or [$2 million].

It's even more.

So it's nice to see that growing as well.

In terms of the technology, I think our Application Control provides much more granularity than competing products, there's a much bigger database of application over the internet.

We know how to do different methodologies of in-depth analysis, and I think it's a great value.

And our threat prevention, when I say threat prevention, it's actually a combined name for several technologies and several blades.

The Intrusion Prevention, which is the biggest one, both in terms of the content and the amount of sale, but also, just like Tal said, the Anti-Bot, which is now a several million dollars in revenues already, and the other blade, like the anti-virus and coming soon will be the threat emulation blade and so on.

So I think together we have very, very strong coverage for different layers and different cyber security risks that companies are facing, and I think that today we are the only product that provides this kind of total protection or an overall multi-layer protection that enterprises need so much in fighting the risks in the cyber space.

Got it.

Thanks for that.

And performance in Europe, you indicated all-in-all stable.

Can you provide us with more color of that specific countries, regions that performed well or a little less this quarter?

No, I think Europe this quarter performed exactly like expected, like the model.

There were some countries that were better.

There were some countries that were soft, but overall, the performance was as expected.

Again, nothing -- in the US, we had a nice jump in the volume and in Europe, everything was as planned.

I can give you some color in the sense that, remember, we are talking about a micro economic environment that is weak.

So taking that into account, we did okay there, which meant we had growth.

We didn't decrease.

But it's single digit, of course.

And when we look at the region, some countries were weaker.

Some countries were stronger.

Every quarter, it's really different, different countries in Europe, so this quarter, it was some countries like the UK and east Europe and a few others, and we had some other countries that were weaker.

Thank you very much for that.

Thank you.

Rick Sherlund, Nomura Securities.

Please proceed with your question.

Mr. Sherlund, your line is now live.

You may proceed with your questions.

Again, Mr. Sherlund, your line is live.

Go ahead and move on, Jessie.

Thank you.

Gregg Moskowitz, Cowen & Company.

Thanks very much, and good afternoon, everyone.

Gil, you mentioned I believe that North America saw the biggest jump in new product sales.

But was this mostly selling into your install base or did you attract a fair amount of new customers as well?

I think it was typical.

It was a combination.

There is always new customers, and there is always -- again, we have a very large install base, so most of the large customers are already customers, but we have a few nice wins and we have a few nice winbacks from competition, and I think overall, we're very pleased with what we saw.

Okay, great.

And Tal, was the ASP increase that you saw both sequential and year-over-year purely due to a mix shift towards the higher end, or were there other factors as well?

Yes.

It's usually relating to a shift, to a mix shift.

So if we sell more high end, we typically see an increase in ASP, which is maybe not in line with what we talked about last year, where we said maybe the larger product takes longer to certify with customers, and maybe that's where we start to see now increasing the higher end products.

Okay, perfect.

One last one, if I could, for Gil.

What is the early response been to the threat emulation blade?

And is it being deployed more often on prem or in the cloud?

The threat emulation blade, the early response is from early access sites that we've tested it on.

And I think the overall reaction is very positive on every site that we had.

We found some new attacks and many attacks that weren't discovered by other technologies.

I think it performs quite well.

And I think it's provided a very unique value to date.

The only integrated one actually -- documents, which is the main source of Malware when you get this kind of strange office or PDF files that look innocent.

Then when you actually open them, you don't notice anything strange, but something infects your computer.

So we're actually getting very, very positive responses from the sites that already tested.

I'm looking into an offering that's mainly a cloud service.

I think it uses the value of our threat cloud infrastructure, and it's a great way to have people deployed simply and quickly and get the results out of the box.

Perfect.

Thank you very much.

Thank you.

Walter Pritchard, Citigroup.

Thanks.

Can you talk about the return of capital and any potential for upticking the rate of buyback that you have going at this time, especially as it relates to the $1.8 billion or so in cash you have that's covered under some of the approved and privileged enterprise jurisdictions in Israel?

I think first, we are very pleased with the fact that we did increase the amount of buyback.

And we always look into that.

We announced the [$1 billion] buyback program.

I think we've executed on it pretty well right now.

And once we get there, more to the bottom of this program, we will consider a new one and at the rate we want to do.

But I think we are very positive about that.

And Tal, just a follow-up to that, are you thinking about that being an end of -- that's kind of a November-December timeframe in terms of getting to the bottom of the issue that Gil was discussing, just to clarify that?

Gil was talking in general, as we did for many years, and we want to continue right now.

To continue to have buyback, and this year we increased it, and when we [frimmage] from there, we will consider increasing again based on the board discussion.

So this is again relating to specifically.

You're asking about the November timeframe regarding the ability to increase from all cash, or from the cash that was before the beginning of 2012, and for that, we have time until November, and we will know by that point.

As we discussed before, there is some consideration for, there's a few consideration against.

We are taking our consideration and we will decide by the time we need to make the decision.

Great.

Thank you very much.

Greg Dunham, Goldman Sachs.

Hi.

Yes, thanks for taking my question.

I guess first question, can you maybe describe how the business progressed in Americas during the quarter, just from a linearity perspective?

And then a follow-up to the previous question.

You haven't done an acquisition in a while either, since 2011.

Can you just comment on your acquisition strategy and what we should expect going forward?

Thanks.

I think the linearity in the quarter was typical to most quarters, a little bit less back-end loaded than previous quarter, but again, this is still, we are talking about a hockey stick phenomena always, and that was the case.

I think the last quarter behaved quite nicely from the standpoint with the business volumes were higher from the beginning of the quarter.

But as I said, since most of the -- since most of the revenues, or the bookings arrive at the last weeks, we can always change, not always indicative.

But last quarter was very positive all along.

Okay.

What was the second part of the question?

The acquisition.

The cash balance is up, like, 30% since '11.

And you haven't done an acquisition since that time.

I know you got the tax issue with the cash balance and you're executing on the buyback.

But I just wanted to get clarity on do you feel that there's an opportune time to be more aggressive in terms of acquisitions?

Yes.

We are investing more time and more resources in trying to find the right opportunities for acquisition, and I would like to think that we will find an acquisition.

I think that we are still being very selective because I think still the main value long-term is finding the right synergies and the right quality of companies, and that's always hard to find and it's not becoming any easier.

But if you look at the location of [MyTime] and several more members of the Check Point management team, we are spending more time in trying to find the right acquisition targets.

Thanks, guys.

Daniel Ives, FBR Capital Markets.

Yes, thanks.

In regards to just anecdotally, are you starting to see more customers going for sort of end-to-end sort of next gen security product portfolios rather than bits and pieces?

I mean, are you definitely starting to see -- the trade-down effect started to diminish pretty significantly, but maybe you can talk about the difference in your conversations with customers.

Is it going from small projects to just larger and larger, it seems, what the numbers indicate?

I think overall, the answer is yes.

The level of professionalism and the level that we discussed with customers is getting higher and higher.

Remember, that's still small percentage.

We're seeing a consistent growth in large deals, but we have several thousand large deals, huge deals every quarter, for still thousands of smaller deals that we see every quarter.

But overall, I must say that I'm meeting and the rest of the Check Point sales team meets with more higher level people.

We have new projects for a full security assessment of the customer environment, which is also turns to be very successful.

We are coming to a customer site and for a week conduct open discussion, open review and then provide customers with total security recommendation, not just about Check Point products.

What should be their security policy, what should they change and improve and do in their security in general.

And I think overall, the level of security discussion is going up and elevated.

I would just add that you see from the software Blade number that we see more and more customers using more blades on our gateway, which allows the nice growth that we see in the software Blade revenues.

Okay, and as a follow-on, you guys are well aware of the perception over the last, we'll call it year or two losing share to some competitors.

Obviously we've seen some of those stumble in terms of numbers.

Do you feel like the tide has maybe turned a little in the channel from what you've come out with from a product perspective as well as just broader high end deals?

Maybe don't talk about specific competitors, but what you're seeing in the bake-offs and how things have changed over the last six months?

I don't think things changed much in the last six months.

I think I would like to say that we're doing it better, and I think we are doing fine.

The market remains competitive.

I think what we are able to offer compared to some of these vendors is much more comprehensive view of security, much more scalable solution and solution to many more problems, even including things like the end point, which highlighted too much recently, but I think we have a lot of things in our plans, that we are offering now that makes our security offering much broader.

I think the IDC reports, published every quarter, does indicate that we are keeping and even increasing our share, so I think overall, the indications are good, and yet at the same time, I don't want to create impression like we are not in a competitive market.

We're in a very competitive market, and I think the ability to win and do it on a consistent and stable basis, is I think one of the qualities that we have in Check Point.

Thanks.

Sterling Auty, JPMorgan Chase.

Yes, thanks.

Hi, guys.

I wanted to dive into the comment, Gil, that you made in terms of the data center.

Can you clarify, I think you made a mention a little bit earlier, but which products are you seeing adopted by the data center?

What type of data centers are we talking about?

Are you talking about [TELCO] data center or enterprise?

And are these upgrades of previous products, and where are you seeing the upgrades coming from?

Either your own solutions or competitors' solutions?

The data center series that we have is ranging from the upper end of the 12000 family to the 21000.

These are data center model, and so they have a quite wide range in price and performance.

It's not just one product.

It's a combination.

There are a lot of new projects that we win, that companies are doing a new security architecture.

There are some places that have new data centers that we equip.

There are some upgrades obviously because we have a lot of customers, and there are even some winbacks in cases where there are some emerging vendors that have won a project a year or two years ago, and the customer is now coming back to Check Point and wants to do the new data center with us, or in some cases even throw out year-old competitive product for, and get back to Check Point once they realize the value.

Okay, and then on a different topic, Tal, on Bloomberg there was a comment either yesterday or day before saying that the financial minister was reviewing taxes paid by top companies, including yourselves and Teva.

Did you see that?

And is there any commentary that you can give us?

Sure.

Of course I saw it.

I'll just give you the context.

If you remember, in the beginning of 2012, the tax laws were changed in a way that the interest rates were -- instead of having different tax rates, now there is a flat tax rate for companies who have approved enterprise.

And then there was a reduction in the tax rate, and now they, because of the micro economic in general in the world and specifically in Israel, there is a need maybe to increase it.

There is a proposal to increase it.

If it passed, it means it would increase back to the level that you have seen in 2012, so you saw it wasn't the significant change.

It's going to increase the tax 1% or 2%, but we'll have to wait and see what is passed in the government.

Okay.

Thank you.

Tal Liani, Bank of America Merrill Lynch.

Yes, thank you.

I'm looking at this year's numbers and your guidance.

This year, the sequential growth rate is worse than every quarter last year, including your guidance, but we should have had acceleration this year.

I'm trying to understand the guidance.

That's the question.

On the other hand, your commentary is very positive.

So can you talk about the areas of growth?

Where do you see improvement and what's driving it, spending versus products?

And also, what causes you -- in areas of weakness, what causes you to be guiding for flat revenues when things need to accelerate right now?

Thanks.

I think first to second quarter, we've seen a very nice sequential growth in business volumes in all indicators, both the product revenues, but also a lot of internal indications that we are looking inside.

As I said, the main areas of strength were the North American market in general.

Sequentially we saw very healthy growth in sales of all products, and year-over-year, the biggest growth were in data center products that we've seen overall.

I think for the year itself, we are maintaining kind of the same levels of growth quarter over quarter that we anticipated before.

We are adjusting the numbers for the year based on the first half results, and I think overall, we anticipate to be in good levels of business and good levels of profits.

And Gil, what are the challenges you have now into the second half of the year, now that maybe spending is recovering, competition had gone up over the last few years, specifically over the last two years.

You have new products also out.

What are the challenges, the main challenges?

Are they on the technology side to come up with new product, et cetera, or maybe on the sales side?

And how do you address the challenges?

First, I don't know if the spending environment is improving or not.

We had a very nice quarter in North America.

And we are very happy with that.

I don't know if it's indicative to the overall spending environment or not.

I hope it is.

Challenges, I think we always have a lot of challenges.

I think the main challenge that we have today from the street, more sales people being more aggressive on our sales and marketing campaign.

Again, I think for the first -- the last three months, it seems that things worked out.

I hope it will continue to work out for the rest of the year.

But we are definitely seeing when we are fighting for accounts and we are showing the value of our product, customers love it and customers do their large projects with us.

I think that's what I would say the main challenge that we have.

And are you happy with the current investment in sales and marketing in the sense that any need to change it going forward, to increase it or to reduce it; how would you characterize your OpEx as a way to address the opportunities?

Generally, I'm very happy with it.

I must also say that I think we're hiring sales people whenever we -- as fast as we can and whenever we find that there is the potential to do so.

Long-term or even midterm, there shouldn't be much impact to the operating model because sales people do provide good return on the investment and in a reasonable period of time.

It would be months, not within years.

So I think it should change the model.

The challenge is to find good people, and the challenge is to find good people in the right places.

And we have a competitive market on that front, and that's very, very hard to find good people.

And I don't want -- I think I don't want to compromise on the quality of people that we have in Check Point, which is an asset for many, many years.

If the return is good in the short to midterm, it should be the relationship with I see employees are long-term.

So I would like to have good people in the company and no compromise on that.

Gray Powell, Wells Fargo.

Hi.

Thanks for taking the question.

Can you talk about the inroads that you're making on the lower end of the market with the 600 and 1100 Series Appliances, and how do you view the competitive environment and margin profile of that part of the market?

So I think first, we just started with these two products, and we started quite well actually.

We did see a nice increase in both units and a double-digit increase in units from these areas of the market and nice increase in the dollar volume for these after many, many years that we haven't really provided new products for their market segment.

I mean, the previous product families that they are replacing is based on products that are almost 10 years old.

Updated a little bit over the years, but basically almost 10 years old.

So I think it's a big change in what we are providing right now.

Indication so far is very good.

The reason that there are two different families, because they are also targeting different audiences.

The 1100 is going into our typical install base, large corporations, and then it's on our existing sales force that needs to be more assertive and address more than the large scale sort of branch office deployment, and that's the 1100.

The 600 opens a lot of new doors.

It's different market segments, market segments which have a lot of competitors, which are not always the competitor is on the enterprise side.

It's a market with more price-sensitive, but has sometimes different distribution arms.

I think we have the entry into that market.

It's not completely new to us.

But it's a blue sky.

There is a lot of openings in that marketplace.

There's thousands, actually tens of thousands of small resellers that we are not working with yet versus hundreds of thousands of small companies that haven't heard yet about Check Point, and there we are looking for more and to find the right leverage point.

The right distribution arms.

The right people that can get us into this bigger market opportunity.

Got it.

And just to follow up, if I can.

Do you feel there is a potential for you to be disruptive on the lower end?

I think we can.

I think, again, we are positively very happy about the review that I described in Network World because it does show that in the market we are coming with a brand-new product, completely redesigned.

We're getting into a market with many companies.

For them, it's their bread and butter, and they improve the product every quarter, and they are doing quite well.

We're not that company, but we're getting to the number one spot instantly in such a big gap, so I hope it does provide some opportunity for some disruption in this marketplace, but again, remember, getting to tens of thousands of resellers takes times.

Sometimes customers in that marketplace are not that educated about the product.

They just want something to do the job.

They are in a typical small business, is not the one would do a month-long bake-off of three different security products to see the differences.

And one thing that's important to us, on one end, I think we see the opportunity and we want to invest in that market, but we definitely don't want that market to disrupt our core market of enterprise sale that remains a first priority for us.

And I think we want to do the two together and not take from the opportunity on the enterprise side.

Got it.

Thank you very much.

Phil Winslow, Credit Suisse.

Hi.

Thanks, guys, on the quarter.

Just had a question for Gil on the pricing environment, just the competitive environment out there.

There's been a lot of -- obviously security's been a very competitive space for a long time.

Just curious if you think the pricing environment is getting stable, getting better, getting worse.

Then also from a competitive perspective, wonder if you can comment generally on win rates and if you're doing particularly better against any one of your competitors.

Thanks.

I think the pricing environment varies.

And I think there are some changes.

Sometimes we see a competitor that would go into one country and be extremely aggressive in one country, and then we see in this quarter a big decrease in prices in a specific region.

Usually it moves to a different place in the next quarter.

So I don't see anything very, very consistent there.

The market remains competitive.

It hasn't changed.

I don't know if there is a big change in the win rates.

We don't measure specific numbers, so I'm not -- so I don't have any long-term data.

I get the feeling that we win more projects and that we are doing quite well, but I don't have any measurable indication to justify that beyond the feeling of our people, especially North America when I think we had a very good quarter and our sales force was feeling very good about it.

Great.

Thanks.

Keith Weiss, Morgan Stanley.

Thank you, guys, for taking my question.

You guys did have a really nice rebound in North America growth this quarter.

It doesn't sound like you're fully bought into the environment got better.

Did you guys do anything better in terms of sales process or marketing process during the quarter or in the first half that started to gain traction, in particular in North America?

I mean, we've implemented a lot of new programs targeting new customers, bringing more sales people, which started again, the tail end of last year, and we had the two big Check Point Experience conferences, and especially the American one had much more attendants than any year before.

So I mean, all these things are good things.

I don't know if there are dramatic changes or they are just incremental evolutionary changes that we are doing.

But obviously, our people are working very hard to bring the results.

Got it.

And maybe a couple for Tal.

In terms of FX impacts, could you walk us through the details on the FX impacts to both the top line and the operating expenses, or overall expenses?

It was very hard to understand you, but if you are asking what was the effect of FX this quarter, it was pretty much less than one tenth.

It wasn't material.

Last year average rate and this year average rate was -- I'm talking about majority of the currencies in total had break-even effect, so some of them went up, some of them went down, [against] the total expenses, it didn't have any material effect.

On the revenues, when you look at -- related specifically to Japan, the currency there year-over-year moved about 23% or so, so in that effect is obviously quite material in one country.

Remember, in Japan, we sell specifically in the end, which is not the policy in any other country.

So there, not an effect on the actual booking in the end, but an effect in the translation back into dollars.

Just as an example, what the currency did -- we had the same, by the way, a few quarters ago in India, where you had the big change in the currency there.

I think also there, it moved 20% or so, and you see the same thing over there.

But in general, I would say that it's very hard to measure the effect on the booking, because majority of the world, a majority of our sales around the world are in dollars, except for Japan and the only thing -- it's affect the budgets of customers, which is different.

But what we can measure is the expenses, and there this quarter it was pretty much break-even effect.

Got it.

And last one, more high level, more philosophical question on the cash balance.

Cash balance is now think over 30% of your market cap, around 33% of your market cap.

Do you guys feel any pressure to sort of better optimize that balance sheet, or any increasing pressure to do something with that cash rather than just have it sitting there on the balance sheet?

Sure.

Related to that, we can see as well the cash balance is $3.6 billion.

I will tell you two phenomena that happened.

We are very interested, as we said for a few years, in M&As.

As you can see evaluation in the security markets are going up significantly.

If you would have looked five years ago, you would be -- it would be very hard for you to find companies in evaluation of more than $1 billion, and now it seems like it's quite easy.

So if you are look and want to keep options open, then you need to have the cash to enable you to have M&A, assuming it's the right M&A, it's the right valuation, have synergies and allow you to grow in the future.

And that's the challenge here.

It's not about the cash for us.

It's more about the valuation and that it makes sense economically.

So that's -- but we definitely like to find M&As.

We said it very clearly.

The second thing is in the buyback.

Obviously, we started three years ago with about $200 million a year.

And now we are in a run rate of $500 million, $600 million a year.

It's quite a big increase, and there might be increase in the future if we continue that way.

I would also like to add, I think everything Tal said is correct, but I would also like to say that this is a problem that I think we share with several high-quality companies.

And I'm actually very proud to have this kind of problem and not other types of problems in terms of balance sheet.

So I think it's always the right problem to have, is to have enough cash or too much cash rather than less cash for what we need.

Excellent.

That's helpful, guys.

Thank you.

Aaron Schwartz, Jefferies & Company.

Hi, good morning.

I just had a question on the data center products.

You talked about strength there.

Can you talk about the blade attach rate on those products?

Is that any different than sort of your broader enterprise sale?

Then secondly, you talked about the sales hiring and the productivity there, it seems like it maybe a little more focused on North America at this point.

Can you help reconcile that with the guidance?

I know you said it's just an adjustment from the first half here, but the adjustment falls a little bit more on the product line.

Are you a little more conservative with the macro, and do the currency adjustments come into play with the guidance here, or is this just a level of conservatism into the back half?

Thanks.

I think that in terms of the guidance in general and so on, I would hate to predict a lot of upbeat business getting into the third quarter.

The third quarter is always the most challenging one.

Everyone is on vacation all over the world.

People are not rushing to spend their budget, new or existing project, because they are always [vet] for Q4.

So I don't want to be, to deduct from one good quarter in Q2 to assume that it's going to be the run rate also in Q3 or the growth rate in Q3.

So I would want to be cautious there, and I think there is good reason for that.

It's not just being -- it's not just being conservative or cautious.

It's the real behavior for real world.

Q2, people had the first quarter, they were considering what to do; I'm glad that they chose us and glad they chose to do more projects with us.

That's great.

I'm not sure if they will continue that in the third quarter or in the fourth quarter.

So that's a little bit about how we look at the guidance and the model.

What was the second part?

The question was the late attach rate for the data center products.

So here I can say one thing.

It can be either way.

It depends on how much blade is actually taking on the box, and they have a lot of options to choose from.

They can take very few or a lot because they can add the package with more blades into the boxes.

Theoretically in the lower end, predefined more blades than in the higher end, but on the higher end, they can add more.

Just as an example, actually this quarter, the proportion of the bundled Software Blade out of the top product was slightly higher than the previous quarter, which meant slightly more moved into the deferred revenue and into the service revenue lines versus the product, which might have affected slightly on the product revenues, which reduced it slightly more.

But it can fluctuate.

I think we got to a point that it's -- it can be pretty balanced between the quarter; sometimes it will take a few more percentage, sometimes less, but the range is probably between 10% to 15% for the last two years.

Great.

Thank you.

Brent Thill, UBS.

Thanks.

Gil, just as you did dig deeper into the US business, were there any verticals that stood out to you that were showing signs of strength that you had not seen in past quarters?

And a quick follow-up for Tal.

I don't think there's anything but the broad statistics that cover, that are indicative of the future.

But we did have wins in the energy sector, and think the financial sector continues to be a very strong sector, and beyond that, everything is normal, and I think we have a very healthy mix of industrial and everything.

All kinds of customers, especially in the US market.

Okay.

So there wasn't one area, one vertical, like financials, that snapped back.

It was across the board?

Yes.

Yes.

Okay, and Tal, just in the second half of the year guidance, when you look at the strength of US business, are you expecting that strength to continue, or can you just give us a sense of how you're thinking about each of the three big regions as you look at the second half?

If you look again at sequential growth -- if you look at the total numbers, you saw America had the great quarter, but Asia had less and Europe was somewhere in between.

But if you can look at the total growth Q2 versus Q1, and you know that Q3 is usually the same or slightly less from Q2, and then Q4 typically grows in 20%-something.

And you can do the math and see what was our assumption.

And the reason you look at it that way is because we don't have visibility into Q4 really.

As Gil said, majority of our booking coming in the last few weeks of the quarter.

So I can't pretend we have a big visibility, that there's a lot of science behind it.

There are statistics.

You have the data.

You have the historical trend sequentially.

I know the compare year-over-year is tougher because of the phenomena of last year, but sequentially, we have a good, historical comparable.

And that's how we based it.

Okay, and just real quick, with the US upswing, are you changing your hiring plans based on what you saw in Q2, or are you still continuing at the plan that you started the year with?

We are continuing the plan which we started, and we have a very healthy plan.

I think we are meeting our internal plans in general in terms of hiring, but it's not easy.

We have to work very hard every week to hire more people.

Thank you.

Dan Cummins, B. Riley.

Thank you very much.

I wonder if you could discuss with us how you're optimizing your spending efforts, your spending this year with regard to getting new customers in the door.

As you look at roughly $500 million of product revenue that you're likely to book in 2013, can you tell us how much you're expecting to come from new customers and what will the improvement or the net change be from 2012?

And if you could really characterize it with some color about verticals and product strata, that would be great.

Thank you.

I wouldn't disclose too much of that.

I think it's very competitive data, and I don't want to reveal all our tactics and strategies for our competitors.

But we are active on all fronts, and we're looking around.

Well, how about just roughly kind of looking at a pie chart of product revenue this year versus last year?

I mean, first half of the year is in the books.

I mean, how much is being contributed by net new customers to Check Point?

Typically, we discussed it before, typically majority of our revenues is the number one in the market and is -- major part of our revenues is updating maintenance.

Typically a lot of it is coming from existing customers, and that hasn't changed for many years.

Okay.

Could I ask a follow-up?

We've talked a lot this year about price sensitivity in firewall at all tiers of the market.

Do you sense a bigger opportunity for you to use your scale, your balance sheet to be more aggressive, perhaps in the mid and low tier, to gain share?

Thanks.

I think we're definitely looking into that, but we also don't want to defocus our efforts.

I think very nice opportunity, especially on small businesses that we can, we are executing on, but yet we don't want to distract our focus from the main core areas in which we are competing, in which we are very successful, especially we just saw with the success of our data center product.

So the low end is a great opportunity.

We will do more on that without taking our eyes off the ball on the data center and enterprise space.

I will add since we know that in the lower end there is a higher sensitivity to price, we price it in a very competitive way.

And so far, it's too early to clap for us, I would say.

We had really good result in the first quarter when it comes to the growth in the units and the booking.

It obviously means the pricing was right.

So you're right in your question, in the areas we think there's a price, then we can adjust the price.

If we think it's the relevant thing to do, definitely.

All right, Jessie.

Move on.

Jonathan Ho, William Blair.

Hey, guys.

Just wanted to get a sense from you in terms of how many software blades customers are now subscribing to at this point.

Wanted to get a rough sense of either that pattern or the absolute number.

How many what?

Software blades customers are adopting on average at this point.

Very hard to calculate because we have the packages.

Many of the customers buy in packages that have three or four or five blades in the bundle.

It can have as much as seven or eight blades versus only three or four.

I can't really calculate that number.

When you look at the total, you can see -- if we look at the total blades that we actually sell, we can see the number continue to increase nicely.

Got it.

And just in terms of clarifying the ASP comment, I just want to understand the trade-down effect that happened in prior years, has that completely normalized at this point?

And if we look at it relative to prior years, is the ASP actually higher now than it has been in the past, so people on average shoot it down one level, just want to get a sense whether that effect is totally negated at this point.

I think it's pretty much going back to the ASP levels that we saw two years ago.

So if that's what you mean in your question.

Yes.

And again, not exactly, because remember -- in the same area.

And obviously, just to be fair, it can fluctuate easily between quarters because the mix can shift every quarter.

What we did see in the last three quarters is a phenomena of higher level of products which led to an increase in the ASP.

Jessie, let's move to the next question, the very last one, please.

Brad Zelnick, MacQuarie.

Thank you very much for fitting me in.

Nice quarter, guys.

I'll just ask one.

Tal, cash flow looks really strong.

Looks like collections were good, but can you take us through the highlights of your cash flow statement and specifically, where do you stand on cash taxes?

Thanks.

I'm not sure I understand the question about the cash taxes, but I will try to answer, and if not, you can ask me a follow-up question.

The main growth in the cash flow came from the collection, collection from customer was significantly stronger.

If you notice, this last quarter we had a very strong cash.

A lot of the cash flow last quarter came from the tax refund that we received.

This quarter, it came from a strong collection.

Another effect maybe year-over-year, last year the balance sheet hedge had a negative effect, and this year, it was pretty much balanced, and that's the main item indicated.

All in all, a very strong cash flow mainly as a result of the collection.

We had found some cash tax payments.

All I can say is that it fluctuates between quarters because you pay advances, and then during the year, you catch up and you pay more, so you can see some quarters you pay less and some quarters you pay more.

So the taxes, I would look at the total year and not the specific quarter.

That was really the question, whether or not this quarter was one where you paid fewer taxes in the quarter, but just even if you look down at changes in operating assets and liabilities, that's a $40 million inflow this year versus an $8 million outflow last year.

Within that, that's the balance sheet hedges, and -- or is there anything else that's significant in that line?

Yes, you can see a material change came from the deferred revenues line and the account receivables line, which is relating to the collection.

You see some increases in the taxes, which means you see some increase in next quarter payment of taxes.

It's a leg on the tax payments like every quarter, but I would say it's regular, nothing special really.

Thank you very much.

Thank you.

Ladies and gentlemen, we have reached the end of our question and answer session.

I would now like to turn the floor back over to Mr. Meintzer for any concluding comments.

Thank you, everybody, for joining us today.

If you would like to get a hold of us, drop an e-mail or give us a call, and we'll be glad to address any of your questions further.

Thank you, and have a great day.

Thank you.

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

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Thank you for your participation.