Check Point Software Technologies Ltd (CHKP) 2014 Q1 法說會逐字稿

Greetings, and welcome to the Check Point Software Technologies' first-quarter 2014 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you, Mr. Meintzer; you may begin.

Thank you, Kevin.

I'd like to thank all of you for joining us today to discuss Check Point's financial results for the first quarter of 2014.

Joining me today 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 May 6. If you'd like to reach us after the call, please contact investor relations by emailing kip@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 this call, Check Point representatives will make certain forward-looking statements.

These forward-looking statements may include: our expectations regarding the introduction of new products, programs, and the success of those products and programs; our expectations regarding capital expenditures; our expectations regarding our business financial outlook, including respect to tax rates and currency exchange-rate fluctuation.

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

Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in Check Point's latest annual report on Form 20-F, which is on file with the SEC, and is available on our website at www.checkpoint.com.

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 of such results, as well as the reasons for our presentation of non-GAAP information.

With that, 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.

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

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

Revenues increased by 6% year over year, while non-GAAP EPS grew 6% to $0.84, coming in towards the high end of our guidance.

Before I present further into the numbers, let me remind you that our first quarter of 2014 GAAP financial results include 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 first quarter of 2014, our revenues reached $342 million compared to $323 million in the first quarter of 2013, representing an increase of 6%; revenues were in the upper half of our guidance.

Total Product and Software Blade subscription revenues represent a growth of 10% year over year.

This growth was driven primarily by the continued success of our Software Blades, which now represent 18% of our total revenues.

Revenues from Software Blade subscription grew 26% year over year, reaching $60 million.

In addition, the success of our data center products -- the 13000 and the 21000, as well as our lower-end products, the 600 and the 1100, contributed the overall product growth.

Our software update and maintenance revenues reached $173 million, representing a growth of 2% year over year.

Deferred revenues as of March 31, 2014, were $660 million, an increase of $74 million or 13% over March 31, 2012 (sic - see press release, "March 31, 2013").

Revenue distribution by geography for the quarter was as follows.

The Americas contributed 48% of revenues; Europe contributed 36%; and Asia Pacific, Japan, Middle East and Africa region contributed the remaining 16%.

In Europe and in Asia, we experienced a slow start to the year, while North America had very good results.

Specifically, we had over 20% product sales growth in North America, the most competitive marketplace.

Transactions greater than $50,000 accounted for 66% of total order value, which was similar to the same period a year ago.

We had 36 customers with transactions greater than $1 million.

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

Our effective tax rate, GAAP and non-GAAP, for the first quarter was 20%, as in the first quarter of last year.

GAAP net income for the first quarter of 2014 increased to $153 million, from $148 million in the first quarter of 2013.

GAAP EPS increased to $0.78 from $0.73 per diluted share in the same period last year, representing 7% growth year over year.

Non-GAAP net income for the quarter was $164 million, or $0.84 per diluted share, up from $159 million, or $0.79 per diluted share in the same period a year ago.

Non-GAAP earnings per share came in at the high end of our guidance, representing 6% growth year over year.

Our cash from operations this quarter was $172 million compared to $331 million in the first quarter of 2013.

This quarter we made the second settlement payment to the Israeli tax authorities.

Last year in the first quarter, we had a significant refund from the tax authorities.

Net of the transactions relating to prior years, our operating cash flow actually increased by 13% from $252 million to $284 million this quarter.

Collections continue to be strong, with DSO of 63 days, lower than the previous quarter.

We began implementing our expanded share buyback program during the quarter, and repurchased approximately 2.8 million shares for the total cost of $183 million.

We expect the number of average shares for the year 2014 to be approximately 193 million shares compared to average 200 million shares in 2013.

This reduction takes into account the increased buyback on the one hand, and the increased share price on the other hand.

Our cash balance reached $3.662 billion at the end of the quarter.

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

Thank you, Tal.

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

We delivered some nice metrics for the quarter: 10% growth in combined products and Blade sales, and EPS at the high end of our projection.

(Inaudible) this quarter came from our data center appliances, which [were T1000] and the 13500, which continue to do extremely well.

We are seeing many customers moving up to the 13000 appliances from lower-end model, based on its exceptional performance and attractive price.

Our [small end] branch office appliances, the 600 and the 1100 models, also continue their fast-paced growth.

But the real proof in the success of our architecture is in the growth of our Software Blades.

Our Software Blades provide the most advanced protection against new threats, and our offer is to [renew the] subscription.

This is the first quarter we've broken out the Software Blade revenues, now that it has become a significant item.

Software Blade generated $60 million in revenues this quarter, and 26% growth, a significant contribution to our Business and its growth.

And the Software Blades are only the first building block in fighting the continually evolving cyber crime environment.

In order to fight today's security threats and be ready for the security challenges of tomorrow, you need more than just good technology; you need the ability to fight multiple threat vectors at the same time; you need a modular and programmable architecture that can adapt quickly to the changing security threats; you need security intelligence that discovers threats and protect the environment in real time; and you need the ability to control and manage it in a combined and effective manner.

This is the driving force behind the Software Defined Protection architecture, or SDP, which we launched this quarter.

SDP enables us to build a security environment today to fight future cyber threats.

SDP is based on three-layered architecture: an enforcement layer, which is fast and agile; control layer, which makes sophisticated security decisions based on up-to-date security intelligence from our ThreatCloud; and the management layer, which enables each customer to [define their] policies and monitor their entire enterprise security.

In the second quarter, we've already translated the principles of this architecture into new products.

Starting with the new Smart-1 management appliances that deliver 3 times more performance, and provide the platform for a future management architecture, our new SmartEvent security analysis products, which utilizes big data event analytic technologies to present attack information; and the new 41000 appliances, which make super high-end security available to more customers.

We continue to tackle the most challenging security threats.

Our recently announced ThreatCloud Threat Emulation service is continuing to provide great results in tackling zero day attacks.

This was evident at a recent test we published this quarter showing a significant higher catch rate for unknown threats compared to other products in this space.

So, overall, I believe that we are innovating and executing well on building the future architecture for security.

This brings me to the financial outlook.

You know my regular caveat: It's always hard to predict the future.

And specifically this quarter, when we analyzed the first quarter, we experienced good results with very healthy product growth in North America.

However, we saw some softness in international markets, especially Asia.

Some of this can be attributed to macroeconomic conditions in specific countries, and the rest to slow start of the year following our very strong fourth quarter.

When we look now into the second quarter, we see on one hand the healthy pipeline and a strong forecast by our sales force.

On the other hand, I want to be cautious given some of the trends in the first quarter.

So, taking these items into consideration, we are expecting good results, but we also like to expand the normal range of our projections.

So, for the second quarter, we expect revenues in the range of $340 million to $375 million.

And non-GAAP earnings per share in the range of $0.82 to $0.90 per share.

GAAP EPS is expected to be approximately $0.07 less.

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

Thank you.

We'll now be conducting a question-and-answer session.

(Operator Instructions)

Gregg Moskowitz, Cowen and Company.

Thank you very much and thanks as well for the additional transparency on the Software Blades at 18% of total revenue this quarter and over 25% of recurring certainly they have become material.

I'm wondering where the blade strength came from this quarter in terms of new business, if you could talk about that?

And then also how renewal rates were this quarter?

Actually, all the Software Blades grew pretty well.

So overall it's from all the blades and --

In terms of order, the IPS is the biggest one I'll remind you, then application control, URL filtering, anti-block is doing very well.

So like you said--

Anti-virus.

It's pretty much across all blades which was very nice to see.

And Tal any changes --

Say that one again.

Yes exactly, if you could talk about the renewal rates that would be great.

Actually again, we don't disclose the renewal rates I remind you because we said it's an absolute number, it doesn't reflect much.

But in general we saw an increase in the unbundled renewal rate.

And by the way keep in mind that most of the growth actually came from the unbundled blade.

The bundled blades are attached to the new appliances we sell so actually most of the growth came from customer who actually decided to purchase a blade and renew a blade which is great news.

So that's the highest growth rate.

Okay, that's very helpful.

And then Gil you mentioned that Europe and Asia each had a slow start to the year and it sounds like certainly more over in Asia which is not the first we've heard of that.

But I'm wondering if you could you some insight into what you've seen there possibly in March and April just to get a more recent status of how things have looked from your vantage point?

I think it's hard to predict the future.

In Asia we had for a few quarters some slowness, a lot of it is direct results of the currency changes and the [accord] wit in Asia.

Europe actually had a very strong fourth quarter and so and a very high growth in product sales in the fourth quarter, so no wonder it had a slow start for the year, or a soft one, I wouldn't even say slow.

And we do have a very good pipeline for the second quarter in that, so I don't know if Europe is set now to show great results on the second quarter or not but left to be seen.

And to your question about April, remember we see very little in April anyway so you can't read too much into April anyway.

Right.

Okay and then one last one, if I could.

I wanted to ask about that 2014 guidance, I think previously you were expected $1.45 billion to $1.5 billion and on an EPS $3.50 to $3.70, is there any change to the expectation for the full year?

No, no change.

Staying the same.

Okay.

Thank you very much.

David Kaplan, Barclays.

Maybe a quick question specifically on the Threat Emulation Blades.

You guys mentioned in the press release that through some proprietary testing or some testing you guys have done on your own, that it seems to have done well.

There was also a very highly public NSS report on the BBS which is some of your competitors ranked high and you guys were not in that one.

So could you talk a little bit about what testing you guys did, why you weren't in that one and how your Threat Emulation Blades to compete or do compare to the other sand boxing solutions that are out there?

So first we are participating in many NSS tests and I think we scored very well in NSS test and we will participate in the future NSS tests when they become relevant.

However, specifically if I compare our tests to the tests they conducted these are very, very different tests.

What NSS did is a test, which again I'm not undermining it or anything I'm just explaining the differences.

Well the test of say finding an attack after the fact, we actually gave each vendor 48 hours to find the attacks.

Our test and what we are trying to do is through real-time prevention.

So we are testing the files on the [site] and we are responding in real time.

So we don't let that site go through, it's not in their tests and in other products, we let the file go through and later on notified the security administrator that malware has entered the network.

In our case what we are doing is very different.

We're testing each file in real time and stopping the bad files.

Now what we've done in our test, which is also a new test methodology, we took several hundred known attacks and modified them slightly, which is exactly what the new attacker would do.

They'll take an attack, they'll make small modification to it and send it through.

We were quite surprised with what happened because we're talking about Threat Emulation, Threat Emulation is exactly what it needs to do, not look at the signature of an attack and identify the attack based on the history, but look at its behavior and decide what behavior is bad.

Our product actually did that well I think you saw the statistics, 99.83% catch rate, so we pretty much caught everything.

Other products we were also quite surprised because the catch rates were much lower, we're talking about 25%, 50% and even 75% but that means that the catch rate for these other products realized significant -- more significantly what you might expect on signature than the actual behavior.

So this is the new -- the different test.

And again in the future, we'll continue to participate in more industry test and we are going to also by the way take our test and make it more public or conducted by further parties.

We are -- I think we think that the test methodology with -- it is the right one, it's very fair one, we're not -- and we'll be very, very happy that more people will use it.

Okay.

And then a second question on the seasonality of the business.

With -- are you seeing any change in the seasonality of the business?

I know a lot -- we're used to a lot of it already, but you guys and some of your competitors also had a particularly strong fourth quarters, so are you seeing any changes there or anything that we should think about in terms of how we build out our models over the course of this year?

And that's it for me.

I'll can tell you what we've seen, we've seen in Q4, you saw when we published it the Q4 results in January, Q4 was significantly stronger than Q4 the year before.

So maybe you can conclude from them, which I think it might be too early to say, that there's more dollars even spent in Q4 and therefore it creates some weakness in Q1, maybe.

Because they hit all their budgets and therefore it's lower Q1, I don't know maybe it's too early to say that.

I would say generally if I look at the trend, it's not a trend for changing necessarily overnight.

If I look at the last few years, we are seeing more typical enterprise buying patterns which means quarters are more backend loaded, the year is more backend loaded, very different from models let's say I had 10 years ago when things were much, much less backend loaded and much more uniform in their distribution.

And you saw it by the way also in 2013, the first half was much weaker than the second half.

So maybe it's intensified.

Okay.

Great, thanks very much.

Daniel Ives, FBR Capital Markets.

So Gil in regards to security spending overall, maybe you could talk about the difference that you're seeing maybe even year over year if you compared over the last years in terms of security spend becoming -- maybe going more the board room, more strategic and how that's changing [field] conditions for you guys especially on the high end?

I still don't think that security is becoming a board issue for most companies.

I do feel that we see a nice healthy demand.

We have a very strong pipeline for the quarter, so I think overall the demand is positive.

I think we do see a lot of wish and consolidation in the marketplace.

Customers would like to have less vendors and unify their purchases and unify their environment from less vendors which I think is a very good trend for us.

So we think the general trends that I've seen.

Okay.

And quickly in terms of the cash situation, now outside of you guys buying a country -- are there any sure thoughts in terms of buyback, increase M&A, change in strategy?

I think we've definitely intensified our M&A work and we're seeing more companies and more opportunities.

Not that it makes it more easier to find a right and the good opportunities but we've definitely intensified that in the last two quarters.

A buyback we did extend this quarter and we significantly we grew the buyback program by 50% this quarter.

And we'll keep looking at all the options to utilize the cash mainly to grow the business.

And maybe to clarify, the reason I mentioned in my script the number of shares is because we increased significantly the cash we spent on buyback.

If you remember last year the average was $136 million a quarter, now it should be up to $200 million and this quarter we had on a cash basis $186 million.

So we used almost all that cap, but yet in the number of shares remember that last year's share was around $50, now we are in [$66.70], so you purchased less shares.

So in total we expect the number of shares obviously to continue and reduce but to the average for the year that you will reach around $93 million because I saw some of you assumed the larger reduction.

You need to take into account also the share price increase.

(Operator Instructions)

Aaron Schwartz, Jefferies.

Thanks for the additional color on the guidance, I was wondering if you could walk through that a little bit more in terms of what gets you to the low end and high end.

Is it fair to assume that if the Americas continue at the strength you just saw and there's no pick up in international, is that what dictates the lower end of the range or could you walk through how you think about the range?

Sure.

So Americas obviously has a very strong quarter as Gil said.

So hopefully America will continue to have strong quarters going on into Q2.

We talked about double digits and I said over 20% for the growth is quite significant.

So this one hand which is great which is Americas.

In Europe, we saw some softness but there remember they were very strong in Q1 -- in Q4, if you go back to Q4 it was very strong.

So it depends.

Will it continue to be weak this quarter or it will go back to the regular rate and become stronger.

If it will become stronger than we should be (inaudible.)

Okay.

And a quick second one if I could, on the cash adjustments to the cash flow, thanks for providing that in the press release, are there any other items to think about this year or is -- or it's the one-time tax payments that are sizable pretty much behind you at this point?

Thanks.

Pretty much behind us.

Brad Zelnick, Macquarie.

Gil, I appreciate Check Point's approach to security has always been software defined, but as the network architecture moves in your direction, I was curious if you could talk a little bit about how it impacts the business not only from a product perspective but even more so how you are thinking about partnerships, channels and go to market or even customer purchasing behavior?

Do you see it becoming less cyclical, less tied to a hardware refresh?

I was hoping you can share some of your thoughts there.

I think the market today is very sophisticated it's not uniform because it's a more mature market, I think the buy behavior is very different.

Some customers are tieing it directly to a hardware purchases, many customers are buying the software [value] separately, I think by breaking out the Software Blade revenues that we have, you can clearly see that we have many customers that are unbundling their appliance or network infrastructure from the actual security (inaudible) and the actual security functionality which we're buying on top of it which is the direction we are aiming at.

We are clearly -- want to show customers when they buy from us an appliance they buy a platform and on that platform they can put a lot of more security value.

And again I think the main challenge today that we're talking to customers we don't see one silver bullet.

If we do that then everything will be great.

Different customer want different things and there's so many different functionalities and I think we're excellently fulfilling that and we are very well positioned to fulfill that with the Software Blades architecture.

But it's not one task to where it fulfill all the customer needs or most of the customer needs.

Okay.

Thanks for taking my question.

Matt Hedberg, RBC Capital Markets.

A follow up to the last one here.

In the quarter you announced Check Point virtual addition, it looks like a collaboration with VMware to secure private clouds.

Can you talk a little bit more about that opportunity and really I think the larger opportunity in the software defined datacenter space certainly as the market pivots towards software?

So I think clearly that's a good thing for us the fact that the market is going towards software.

That means that first with our strength.

Second, if you look at virtual environment our software is software so we can put it anywhere on the network.

We can put it on virtual servers.

We can put it in cloud environment.

And that's very natural to us unlike most of our competitors that rely on proprietary hardware and for them moving to software to different places is more difficult.

Furthermore, if you look at the things like SDN, that architecture is actually I think it'd be very, very good for us because what many people don't see is that it enables rerouting the software to many network services and one of these major network services can be security.

Now we can have two people sitting on the same floor on the same physical network which are getting two different security compartments which is the situation.

One person behind the let's say that finest network and one person behind the [guess] network and people that are connected together to the network.

So the SDN architecture clearly and the whole virtualization is something we should benefit from.

I must say that this is very, very early stage and most security deployments today are still down in the more traditional way.

And we are absolutely looking forward to the expansion of the security and the new environment.

Thanks, Gil.

Walter Pritchard, Citigroup.

Gil, I wonder if you could talk about the datacenter strength that you saw and I think a number of your competitors have released products in that area as well and have seen some strength.

And I'm wondering is that a market that you believe is growing significantly ahead of where the overall space is growing?

Or is your new entry in that market enabling you to gain share?

Or is there some other factor that's driving your growth and what seems to be the market growth in that area?

I think there are many segments of the market not just one and I think there is many upside opportunists.

I think what we are seeing here is that the customers on the higher end of the spectrum -- if they get the right venue for their money there we (inaudible).

So I think if you look at our datacenter appliances, they are to date the biggest segment dollar wise of our appliances segment.

Very small in terms of units.

Don't -- let's not get mixed on that, it's the highest dollar contributor and still only a few percent of the overall units that we ship.

These customers if they get the rights then they're willing to spend and I think with our 21,700 and 13,500 we are showing that we can deliver a very good price performance and very good quality build for the appliances and customers are buying into that.

And what we've seen is that in some cases, it helps us win new accounts and new projects.

In other cases customers that before bought one level below that appliances simply decided to spend a little bit more, spend 20% or 30% more and buy something with twice the power.

Which is also important because I think with the more power, the more security power people put on their network, the more security capabilities they can activate which is exactly the direction we should use to block not just use it as a basic firewall like they did many years ago, but choose all the Software Blades and use all the new functionalities of security which we all need on our networks.

Great.

Thank you.

Gray Powell, Wells Fargo.

Do you see APT or sand boxing solutions creating new budget within network security or do you see it taking budget from legacy solutions?

And if it is taking budget from legacy solutions, what do you think that risk?

I think today the security budgets is still fairly small for most companies and I think when people want to get additional budgets, they can get additional budget.

And I think it varies by organization, some organizations are very well-established budget and for them it's a game of switching the budget within categories of organization.

Most organizations, the security purchase is based on the need.

It's still let's say 1% to 5% of the IP budget, a company which has even a significant tight budget but not huge, let's say $10 million budget, security budget can be $100,000, $200,000, $300,000, it's not something that is too difficult to increase when there is a need.

And I think where we are trying to show our value is showing that customers can get better security.

They can get it within very tight budgets because when you put more Software Blade with the same equipment or in the case of the Threat Emulation is getting the service from the cloud, so in many cases it doesn't require any equipment to run it on.

They can get the highest level of security in I think in quite reasonable budgets.

Okay.

Thank you very much.

Karl Keirstead, Deutsche Bank.

If I could focus on that 20% product growth in North America, very strong.

Could you offer a little bit more color as to what drove that?

Was -- were there any particularly large deals?

Was there anything in the macro?

Did you see any refresh activity pick up?

Thanks for any color.

I think it's mainly healthy pipeline in mid-sized deal.

We didn't have an increase in large deals, so it didn't come from large deal.

It came from middle size deal, I think large deals in America were kind of the same level as last year.

So all the growth from -- came from a mid-sized deal and more of them.

Which for me it's an excellent sign because that creates more opportunities for the future, more in customers and more market share which are all important things in building a company for (inaudible).

Okay.

And on that the softness in Asia Pacific in particular, are you attributing it entirely to macro or is there anything that in your judgment Gil is under Check Point's control that you might tweak the sales process, make any kind of change?

I think we always can do better and I think we have -- we've pretty much now replaced most of our Management in Asia.

We are adding more sales people and changing that.

I think part of it is part of the economy when people seeing that times are tough, some people have hard time functioning under that pressure, some people do.

But I think there's definitely more things that we can do to control it, so I'm not trying to blame the economy solely.

I'm trying to say the background for what we are doing and we are always saying that it is our responsibility to produce better results and we are doing a lot of it.

Great.

Congrats on that North American performance.

Thanks.

Michael Turits, Raymond James.

So you said that you were anticipating Europe coming back in 2Q to get to the midpoint of the guidance.

What are your assumptions for Asia?

I assume that that'll come back to get to the midpoint or can that stay where it was?

I can't explain here how we do the forecast, I remind you and I'm definitely not going to do it by geography.

I can remind you that in general we take the forecast on the field, we take the history, we take sequentially what we have seen and based on that we create a range.

All we said that as North America was very strong, which is great indication and Asia continues to be weak and Europe is somewhere in the middle following a very strong Q4, we just provided a bigger range.

Okay.

And then you talked about this year increasing your investments in OpEx around some of the new products like Threat Emulation, more marketing, SMB, recruiting.

Can you give us an update guys on that in terms of where that spending has gone so far and anything we can do to measure whether it's headcount growth or anything you can talk about and then where you might be starting to see return on that?

So you can see that the margin didn't go down which means we just started, and we continue to increase throughout the year.

I think we also a lot of that extension already started to help last year, so today we started the year with a much higher average headcount than we had last year.

And we still want to invest more.

We still want to add more, but a big part of it is we're already started the year with a higher level of headcount and a higher level of investment in the, especially in the [sale].

If I can squeeze one last one in.

Cash taxes obviously you had the second big payment to the Israeli tax authority this year.

If I look into 2015, should I -- if I X out that tax payment, should I think of the cash tax rate percentage of whether GAAP or non-GAAP pretax being about the same going into next year X the one-time payment this year?

Or would go up X that tax payment?

Pretty much.

This year because remember this year the tax in Israel increased if I recall to 16%.

So if I would have had to make a quick calculation how much should be the cash payment, probably around somewhere there 16% slightly more with -- around 16%, 17% maybe that's the cash payment.

And I just want to reiterate one point, I think it's probably obvious to all of you.

All the tax payments which we are talking about had an effect on the cash balance as the P&L I think we didn't have any effect with entry quote any one time hit or anything on the P&L.

It was all I think managed well by the finance team here.

Right.

No I understand it's still only on the cash side but -- so bottom line this year for 2014 it should be -- the cash tax rate X the one-time payment should be about 16% and it should be about 16% next year in 2015 cash tax?

That should be the range.

I mean our P&L rate is 20% and I said that's pretty much the range.

So in previous years you had a higher provision for taxes and lower cash payments.

Because if you remember the tax rate in Israel was much lower but there were a lot of tax risks associated.

Now it's pretty much much lower tax risk and a slightly higher tax payment.

So it should meet somewhere in the middle, so probably somewhere between 16% and the 20%.

Okay.

Thanks very much.

Greg Dunham, Goldman Sachs.

One from me and it follows up on the question.

I want to make sure I heard that the adjusted March cash flow from last year was $252 million from operations?

And then if you make that adjustment, than the normalized cash from operations in 2013 was $710 million if you adjust for that.

Is that the right base to grow off of when you look at cash flow from operations for 2014?

We're just talking now about Q1 exactly.

So there was also in Q4 last year a significant tax payment.

If you remember we had the settlement with the tax authorities and the settlement was made in total payments.

One payment was in Q4 last year and one payment was in Q1 this year.

The second thing that was extraordinary I will call it was that in Q1 last year we got a refund from the tax authorities.

So when you look at 2014 you can definitely look at the $252,000 -- or 2000 sorry, $284 million right because I said if you eliminate the tax --

That was for the first quarter.

Yes, if you eliminate (inaudible) with the prior years, we increased from $252 million to $284 million.

That was the numbers.

Okay and then to ask a more simple way when you look at last year's [$790 million], right, you got a $79 million benefit in March.

What was the hit in December, what would that [$790 million] adjust to is the question?

Again, in Q1 last year we had the refund.

In Q4 last year, we had the tax payment to the tax authorities.

And if you look at Q4 -- in the Q4 transcript, you will be able to see the exact amount.

I don't have it here in front of me.

Okay.

Well I'll look back at the transcript.

Thanks, guys.

Keith Weiss, Morgan Stanley.

Two real clarification questions.

One for Gil.

In terms of when we're speaking about moving towards more software focused, is this something that we're expecting on a going forward basis or is this something that you're seeing in customer purchasing behavior today in terms of the percentage of purchases that are coming on Appliance versus personalized platforms or a software only basis?

And then I've got one follow up for Tal.

First I think in the past our sales were only software, it's only in the last five, six years that we are selling Appliances.

I don't think that customers look at it to say hardware or software, I think customers look at it as what's the best way to secure their network.

I think that today most of these are based on Appliance platform but I think we are clearly showing on the Software Blades that we could shift more revenues towards fewer software when the value is there.

And in the future I think that some of it will continue.

I think what customer will see the value -- the added value of the software.

Got it.

It's more of a perspective comment of that that software value continues to grow and going forward might shift more to a back towards a fully software solution.

It may happen, yes.

Okay.

And then for Tal, on the call I don't know if you delve into the FX impacts this quarter in terms of the revenue (inaudible) that if there was anything significant this quarter?

I think -- last year you remember that the rate in the beginning of the year was around $4 -- 4 share count for the dollar and then now we are in around [$3.4 and $4.75], right.

So I would say the impact right now is around $0.01 on the EPS.

Okay.

For the first --

Okay from the expense side of the equation?

Yes from the expense.

Obviously from the income side, it depends what area on the currency.

So that's why we said in Asia the currencies are not that great and therefore it's effected our budget.

We talked about it in previous quarter and it didn't improved significantly since then so I think that has some impact on the customer budgets in Asia which affects their buying power.

Right.

And when you guys see something of that ilk, is it possible that you'll have to go and adjust your pricing to match to the currency on a go forward basis?

Or is it something that you wait for it to normalize through and they're going to have to get used to their reduced buying power?

No.

I think generally we are waiting or price (inaudible) almost all countries except Japan or in US dollar.

But obviously when the environment needs let's say extra discount to close the project, we might give it if it's the right thing to do.

Excellent.

That's a result of the [calloused] economy.

Got it, excellent.

Thank you very much.

Tal Liani, Bank of America Merrill Lynch.

I have two questions, three actually.

First is the long-term deferred revenues were up strongly.

Can you discuss the components of long-term deferred revenue and the components of the growth?

The second question is about longer term you're guiding roughly give or take 6% if I take the midpoint about 6% revenue growth and you've grown 6% year over year at this time.

Your long-term guidance is 10%.

What do you do in terms of strategy products go to market?

What do you do in order to drive up growth to that level?

And the third question is about the Board meeting you have in May, your Board meeting and typically if there's any buyback decision or dividend decision if I'm not wrong, it happens in May.

And I'm wondering now that you paid the taxes to the Israeli authorities and the cash flow is very strong, what different -- what is the difference this time versus previous times in your views on dividends pros and cons?

Is there any change and is that different tax situation drives you more in favor of dividends?

Thanks.

Okay.

I have to say I remember question one and three, I don't remember question two.

I'll take you through it, yes.

In terms of the long term deferred revenues, like I always say, I say sequentially if this can fluctuate between quarter to quarter sometimes the customer has a budget and he would like to put in an order for the updated maintenance three years in advance or two years in advance, with splits between the short term and long term so you will be able to see it.

But there's not much to say about it.

It really depends on the customers and their budget.

And you see it moved out but I didn't talk about it because when it goes down, I tell you you shouldn't read too much into it.

Also when it goes up, you shouldn't read too much into it.

It just means healthy budget so people maybe uses them for -- to put an order for two or three years in advance.

So that's one.

But nothing really dramatic to discuss.

In terms of the Board, so actually the release of the tracked income, as we called it, already happened before the last Board, so that discussion already happened.

And the result of that discussion was that we increased our buyback significantly from the $500 million last year up to $200 million a quarter, which means around $800 million a year which is pretty close to our cash flow.

So this is behind us and we already had the Board and we already communicated the results of that.

To remind you in terms of buyback versus dividends, we said with our investors the majority by far prefer buyback, so we went with the buyback.

And Tal, what we are doing strategically to increase the growth rate, I think there are so many things we are doing, but I've tried to address some of them like the SDP, the Software Defined Protection architecture.

Like more Software Blades which we'll address more spaces like the first Emulation, the Anti-Bot, the [DLP] and of course longer time ago the application control, the IPS, so what -- which are clearly showing the results and are increasing our growth rates.

And we will come up with more Software Blades when do that.

I think combining the platform with the more blades, I think clearly has a role in driving the consolidation in the market place and increasing our own growth rates.

Is there anything you need to do also on the go to market side?

Yes there is and I think we are also making changes to the improvements in many of our go to places areas.

Thank you.

Phil Winslow, Credit Suisse.

Most of my questions have been asked but wanted a little more color on maybe what you're seeing between small and mid size businesses and larger enterprises in terms of the quarter?

And then what your thoughts are as you look at your pipeline for the year?

Thanks.

I think we serve all segments.

I think we're very happy to see that we have little investment in the segment of small business that is growing very fast.

I think we are still -- we are investing more in that and we want to build a significant sales force to address the small businesses.

Clearly our products has doubled year over year shows that there is a potential to that because I think we do have the best product today for small businesses in the marketplace.

And I think in the datacenter and higher end customers, we're all seeing a lot of success.

And at least this quarter a lot of success came from mid range customers not just from the two ends of the market.

So I think overall we're doing okay in all segments and I think we have potential in all segments which we definitely want to fulfill.

Got it.

Scott Zeller, Needham & Company.

It may have been asked earlier but I wanted to ask if there's any color you could offer us on the behavior of the new revenue breakouts for Software Blades and seasonality perhaps, how that should track versus the actual product license?

So actually when we talk about -- I assume you're asking about Software Blade subscription.

And since it's recognized like any other service, which means [rapidly] over four quarters over the life of the contract than typically in revenues not in booking, in revenues you don't see significant seasonality.

Every quarter it should increase over time and it's usually increased like slower just because it takes time to recognize the revenues.

So it takes four quarters.

But you see that's the 26% so it's -- you're not supposed to see a huge fluctuation between the quarter.

If everything is going well, you should see it increasing rapidly over time.

So that's the intent of the subscription.

In terms of the booking, it's the same phenomena.

A huge amount comes at the Q4 and then seasonality you see it's [possible] deferred revenue, so you can see it very clearly.

Typically deferred revenues increased significantly in Q4 and then it goes down in Q1.

It goes down in Q2, it goes down in Q3 and then it goes up in Q4.

So that's I would say probably linked to the same phenomena.

Thanks for the clarification.

Shebly Seyrafi, FBN Securities.

Can you talk about the Threat Emulation Blade?

That's a high-profile sector right now, how big is that relative to your overall blade business and how big can it become?

We just started with the Threat Emulation Blade, but it's actually going quite well.

It's still too small in terms of revenue impact, but in terms of the interest level is quite high.

We have several hundred customers already trying it out.

We have some nice customers that have already purchased it and are using it in production, so I think overall it has a good pipeline.

I'm positive about that.

I think we have all the elements of the cloud service and local appliance or a private cloud for the customer they can utilize.

I think we're clearly extending it in our benchmarks that we released this quarter.

I think we are very proud of our achievement.

I think we have the highest catch rate to behaviors to various behaviors than any other vendor in the marketplace.

So overall I think it's -- we're set for a good start and I compare to other blade, it has a pretty good start in that.

But it still takes a couple of years to build a significant revenue stream in our site.

But want to say it looks like the blade segment is your key growth area going forward.

And so I want to see how you're going to continue to drive growth in blade.

It looks like IPS, app control URL filtering, those are the big blade driver that swings the needle right now but maybe you can talk about within say those three, which ones are exhibiting higher growth rates right now?

And what do you see going forward?

I think the newer blade -- the smaller blades are obviously showing higher growth rates than the big blades.

And the big blades continue to factor that we have the many customers already using them and already have them.

So that's --

Anti-Bot for example is probably one of the highest growth and --

But it's still small compared to IPS or --

Threat Emulation is obviously the highest, but [slowing down] while IPS is the biggest number in terms of dollars, so almost by the finishing one of the slower one although it's still a double-digit growth.

Okay.

Thank you.

Thank you.

We've reached the end of our question-and-answer session, I'd like to turn the floor back over to Management at this time.

Thank you guys for joining us today.

We look forward to speaking to you throughout the quarter and then catching up with you next quarter for the next earnings conference call.

Take care and look forward to seeing you all.

Bye, bye.

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