Check Point Software Technologies Ltd (CHKP) 2014 Q2 法說會逐字稿

Greetings and welcome to the Check Point Software Technologies Limited second quarter 2014 earnings conference call.

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

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

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Kip E. Meintzer, Head of Global Investor Relations for Check Point Software Technologies.

Thank you, Mr. Meintzer.

You may begin.

Thank you, Melissa.

Hi everybody.

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

Joining me on the call today is 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 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 August 1. If you'd like to reach us after the call, please contact Investor Relations by e-mailing me at kip@checkpoint.com or by phone +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 and programs, and the success of those products and programs, and our expectations regarding our business and financial outlook, including our guidance for Q3 2014.

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 and Exchange Act of 1934.

Because these statements pertain to future events that 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 risk discussed in Check Point's latest annual report on Form 20-F, which is on file with the SEC and is also available on our website at 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 a reconciliation of such results 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.

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

I'm very pleased to begin the review of this great quarter.

Revenues for the second quarter increased by 7% year over year while non-GAAP EPS grew 8% to $0.89, coming in at the top of our guidance.

Before I present into the numbers, let me remind you that our second quarter of 2014 GAAP financial results includes stock-based compensation charges and 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 of 2014, our revenues reached $363 million, compared to $340 million in the second quarter of 2013, representing an increase of 7%.

Revenues were on the upper half of our guidance.

Total revenues from products and Software Blades grew 10% year-over-year.

This growth was driven primarily by the continued success of our Software Blades, which grew over 20% and represents 18% of our total revenue.

The main drivers were the Retention Control, Anti-bot, and featuring blades.

We also had continued success in our data center and the super high-end appliances, which contributed to the overall growth.

Our software update and maintenance revenues reached $175 million, representing 4% growth year-over-year.

As you recall, last quarter, we provided additional color by splitting the revenues from software update maintenance and subscription into two lines.

Revenues from Software Blades subscription and revenues from software update and maintenance.

This quarter, we also classified the Software Blades subscription that were part of product revenues into subscription revenue line.

Comparable data for prior periods was adjusted accordingly.

Deferred revenue as of June 30, 2014, were very strong at $660 million, an increase of $18 million or 14% over June 30, 2013, and similar to the end of March 31, 2014.

Revenue distribution by geography for the quarter was as follows: Americas contributed 49% of revenues; Europe contributed 35%; and Asia Pacific, Japan, Middle East, and Africa region contributed the remaining 16%.

From a deal side perspective this quarter, we saw an increasing number of large deals.

Transactions greater than $50,000 accounted for 72% of total order value compared to 68% in the same period a year ago.

Number of customers with transactions over $1 million increased by 35% to 54 customers this quarter compared to 40 in the same period last year.

Our non-GAAP operating margin this quarter continues to be strong at 67%.

Our effective non-GAAP tax rate for the second quarter was 20%, same as the second quarter last year.

GAAP net income for the second quarter of 2014 increased $260 million from $151 million in the second quarter of last year.

GAAP EPS increased to $0.83 from $0.76 per diluted share in the same period last year, representing 9% growth year-over-year.

Non-GAAP net income for the quarter was $172 million, or $0.89 per diluted share, up from $165 million or $0.83 per diluted share in the same period last year.

Non-GAAP earnings per share came in at the high end of our guidance, representing 8% growth year-over-year.

Our cash balances were $3,643 million at the end of the quarter.

Our cash from operations this quarter was $168 million compared to $205 million in the second quarter of 2013.

The decrease relates mainly to stronger collection in Q1 this year versus last year and the increasing tax payments in Israel.

Collection continues to be strong and our DSO was 61 days, lower than the previous quarter.

Cash flow from operations for the six-month period ending June 2014, net of the tax effect, net of taxes was $523 million compared to $500 million last year, representing an increase of approximately 5%.

We continued implementing our spend and share buyback program during the quarter.

We purchased approximately 3 million shares for the total cost of $194 million.

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

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

We had a fantastic second quarter.

We delivered 10% growth in products and blades revenue and attributed revenue and EPS at the high end of our projections.

Software blades continued to lead the charge with over 20% growth this quarter, underscoring the 10% overall product and blade growth.

Data center appliances and super high end contributed to the overall strength this quarter.

In terms of new technologies, we continued to strengthen our threat prevention offerings with another important layer of security, the ThreatCloud IntelliStore.

The IntelliStore is a unique cyber security network which allows each customer to fit the most relevant security intelligence forces and automatically receive the latest security threat information that is being translated into real-time prevention.

We believe that more of our solution in the marketplace provides the capability and as the importance of cyber intelligence increases, these solutions can be a critical factor in fighting the most sophisticated attacks.

We believe our software deliver the most comprehensive and most integrated threat prevention solution in our industry, which includes our IPS solution, Network Anti-Virus, Web and Application Security, Unique Anti-bot and the Threat Emulation Software Blades.

If you try to replicate these technologies, it would require between 3 to 10 point solutions.

Our integrated approach not only simplifies the deployment and the accretive cost but it also elevates the level of security by delivering full coverage of metric traffic in a single management platform.

While we believe that we are all in the early stages of market penetration with these threat prevention technologies, today we already generate more than $250 million in revenues on an annual basis.

Geographically, we continue to do very well in most regions.

The US continues to be the standout.

Europe posted very nice product growth.

Latin America had some major wins and most regions of Asia grew nicely.

During the quarter, we saw a an uptick in large deals.

Business from new customers increased by 20% and new business wins ranged from small deals to very large multi-year strategic contracts.

Talking about major wins, let me give some examples of strategic contracts that we won this quarter.

One is a multi-year contracts with one of the world's largest financial institutions that is consolidating their security infrastructure using our Software Blades.

This is one of the largest contracts we've ever seen.

Another one is the university that had a very large deal replacing the competition with several of our largest appliance solutions.

Another example is the hospitality chain that's standardizing Check Point in hundreds of locations worldwide.

This leads me to the financial outlook.

The normal regular caveat, which is always hard to predict the future, there are many factors that can point to better results and there are many reasons to be cautious.

For the first quarter, we expect revenues in the range of $355 million to $375 million, and non-GAAP earnings per share in the range of $0.88 to $0.92 per share.

GAAP EPS is expected to be approximately $0.07 less.

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

Thank you.

At this time, we'll be conducting a question-and-answer session.

(Operator Instructions)

Michael Turits, Raymond James.

Michael Turits.

How are you?

Just two things.

One on Europe.

It sounds like you did well in Europe a little bit.

The revenue growth still seems a little light so should I assume that the orders were stronger and picked back up after last quarter?

Obviously, revenues is not always in link.

You have other accounting revenues position but you're right, booking in Europe was strong, both in products and in services.

Anything that you can think of to describe what helped things pick up.

Was it on the demand side?

Did you find execution issues or how should we look at the pickup?

I think it's overall.

I mean, I think we have a prudent execution but I think we had also many wins and a lot of product uptick and Europe was the strongest this quarter in terms of product growth, much faster than any other region and that we have seen for a long time in terms of the uptick there.

And I think some of it is maybe also the seasonality in that regard.

Okay.

And I have one more.

Just on cash flow, it was a little bit weaker than some estimates.

You did mention cash tax payments, which we knew were increasing.

Is there any change in that outlook for the full year in the amount of cash taxes that you'll be paying, or is that what you had previously guided to?

Our expectation was what we had previously guided to, if you remember, I said that the middle of the tax rate moved from 12% to 12.5% to 16%.

It's almost like a 40% or 35% increase and you see it in the cash flow effect and also the collection in Q1 was very strong on the expense of the Q2 collection.

So we executed very well in Q1 which made Q2 slightly look weaker.

Okay.

Thank you very much.

Walter Pritchard, Citigroup.

Hi.

Thanks.

I see you're seeing an uptick in sales and marketing spend.

If I look year over year, it's growing faster than your other expenses.

We've noticed more hiring and so forth.

I'm wondering if you could talk about what sort of benefits you've seen thus far from the increased sales hiring and how you expect that to roll through or impact your revenue in future quarters and then just had one follow-up question.

I think in terms of dollars, there's several things that affect it, but first in the second quarter, we had several of our largest customers and partners conference, Check Point Experience Conference, and they were a big hit this quarter.

And we've got record attendance in both conferences; one in Europe and one in the US.

And they both had a very, very nice growth in terms of number of participants and that links directly to the dollar value and that's one effect.

The effect of the dollar has also had some effect on that because our -- some big part of our expenses in the international markets in Europe and Asia and the weakness of the dollar is impacting that.

And of course, we also kept adding more headcount which we think is helping us.

I mean, it will help more in the future.

Got it.

And then just one last one on -- Tal, you didn't mention the IPS blade in your list of blades that were driving your performance there.

Has that one now reached a sort of point of saturation?

Because I heard you mentioned App Control, URL and Threat Emulation as blades driving growth.

Sure.

So IPS is growing as well but I had to pick the top three and this quarter it wasn't one of the top three.

It's still the largest blade but it's not growing as fast as the others (multiple speakers) --

Okay, okay.

Understood.

Makes sense.

Thanks a lot.

Thank you.

Shaul Eyal, Oppenheimer and Company.

Thank you.

Hi.

Good afternoon, guys.

Gil, on the heel of your third-quarter guidance, it's fair to say that annual guidance has been reiterated at this stage?

We didn't say, but so far, we don't change it.

Yes.

I mean, we've been, I think, okay the last two quarters or actually this quarter, even much better than okay and I think it's reaching progressively in line, yes.

Got it.

Fair enough.

And on the headcount, following on the heels of the prior question, where is it geographically that you guys are putting emphasis?

Is it APAC?

Is it EMEA?

And also what's the status in Japan?

I recall last quarter it was a little sluggish.

What's the current status there?

I think we are well vested in all regions.

I mean, we have open headcounts in the US, in Europe and Asia.

We keep investing in our development organization and other organizations that are in Israel so there's nothing too specific about that and this quarter the headcount grew slightly.

Thank you.

Thank you.

In Japan, I would say particularly, I think had some nice growth this quarter specifically if we talk about that.

Gregg Moskowitz, Cowen & Co.

Hi.

Thank you very much and good afternoon, everyone.

Gil, how is the service provider business for you in Q2 and specifically, how did the 61000 Appliance do, just solving some of the recent engineering improvements that were made around throughput?

I don't have the data in front of me, but as much as I recall, the service provider we had did quite well in the second quarter.

Okay.

And then I wanted to follow-up on Asia as well.

I know Michael asked about Europe.

Asia did also struggle in the first quarter and I'm wondering if you had some more insight into which territories performed well this quarter as well as which ones remained challenging.

Europe I think most of everything behaved pretty well I think.

Most Europe did very well.

The Nordics were quite good.

I think we saw an uptick in southern Europe so I think -- and I think that the star was actually the Central Europe countries --

Yes.

Central was very good.

The best parts.

So I think overall, we did very, very well.

In most regions, they did very well and also in Asia in those countries, they had a good quarter.

Okay.

Thank you.

And if I could just ask one last quick one.

I'm curious if you had seen any significant deal sizes or customer commitments for Threat Emulation yet?

Thank you.

The Threat Emulation is still in the early stages.

We did have a very nice number of customers that actually signed up.

We had even a bigger pipeline of customers with the Emulation.

Nothing that's very sizable in terms of deal size.

Okay.

Thanks.

Sterling Auty, JPMorgan.

Yes.

Thanks, guys.

Gil, you mentioned a couple of the very sizable wins and what they are used for.

I'm kind of curious what the competitive landscape was like in those very large deals and what the deciding factors that swayed them in your direction were.

I think each one was most likely different.

Each one was competitive, like most of our business.

I don't know specifics.

I think one thing that was very important for all of them and that's what we are hearing all the time from customers -- our management platform.

They simply say you cannot manage large environments with any other solution.

I mean, to spell it out in my head, last week, many meetings with customers when we interviewed them.

They tried to say that our interviews about what we think about our strengths and so on.

And they all said, out loud, that our management is superior to any other solution and no other solution scales to large sizes of management.

I think another factor that was part in the most of the deals is the consolidation of the infrastructure and using our software blades and using the server platforms.

So I think these are the common things to most deals.

You mentioned in the press release and in your prepared remarks some of the realtime monitoring capability that's coming.

Is that integrated in part of Provider-1 or is this an add-on module?

We are the Smart-1 -- I don't -- if you're talking about Smart-1 which is the event license part; that's integrated to our management software, that's not a management blade so it is an add-on blade for the management.

And it's actually bundled and integrated in some of the new Smart-1 Appliances, which is also launched this quarter.

I didn't mention [the year] but we've also launched one this quarter.

This quarter what we've also released is the next generation of the Smart-1 Analysis and that actually will be part of our next generation management that will be released next year.

This event analysis part of this that links to the existing product to go we will be shipping now.

And last question.

We're several quarters into your latest investment phase in trying to be more successful in the SMB space.

Can you give us some color and update on how that's going?

I think we continue to see nice yearly growth in the SMB market.

Overall, I think we've more than doubled our SMB units in the last year or year-and-a-half since we've -- at least actually four or five quarters since we launched the product a year ago.

Yes.

I think it was Q2 a year ago so it's been exactly one year and I think we've more than doubled our unit numbers and we've also seen very nice uptick in revenues overall and so that trend continues.

It still not huge numbers if you look at the dollar contribution.

All right.

Thank you.

Robert Breza, Sterne Agee.

Hi.

Thanks for taking my questions.

Gil, maybe as you look at the landscape between SMB, service providers, et cetera, that you talked about in the call already, I was wondering if you would just address the upgrade cycle that maybe you're seeing with some of these larger customers.

Are they looking to add more functionality, more capacity?

What's kind of really driving some of the firewall upgrades?

Thanks.

I think in terms of -- if I were to look at customers, they absolutely want the new upgrades.

They are looking into adding additional blades and the IPS Blade, for example, is almost standard in many, many implementations.

The new blades are definitely something that they are looking at.

I think they all see the value of consolidation of new security functionality but keep in mind that when you speak about deals, it's varying by size.

For example, the very large customers, for us and for them, the upgrade cycle is a huge potential.

On the other hand, it's not very fast because upgrading an environment with a 500 Gateway takes a long time.

So it's several -- it takes us -- it may even slow us down rather than accelerate growth.

If you look at other size deals or new types of deployment, then I think our multiple blades and our architecture accelerates the growth and provides a lot of value to this kind of deal.

Great.

Thank you very much.

Daniel Ives, FBR.

Yes.

Thanks.

As sort of a follow-up to Rob's question, I mean, Gil, do you believe, in terms of just a firewall refresh, that there's just a massive refresh going on as a cycle within the enterprises?

I mean, you obviously could have a good gauge in terms of historical.

What's your view of that just as a cross enterprise?

I think it's an ongoing process and I think it's about different, some other technologies.

Most of the technologies are being built for a -- most are being upgraded every few years.

Most technologies are not being used for 20 years.

In securities, it's very, very clear that the upgrade is important because you get a lot more security and security is the thing that determines the needs.

It's not what you like to have; it's what the risks outside and what the threats outside.

So the threat landscape is evolving and it's definite the customer needs more security.

Still I think we have good products.

So many customers you have a product that's five years old and seven years old and sometimes even longer than that and they work and they do the job.

So sometimes there's an explanation to the customer of why it is important to run a new version of software and a new type of appliances that they can accommodate that.

But overall, we're always in the cycle of an upgrade.

That's the situation.

Look.

Thanks and stay safe, guys.

See you.

Rob Owens, Pacific Crest.

Great.

Thank you.

Can you talk a little bit more about your ThreatCloud IntelliStore and how you guys are going to monetize this longer term?

Does this market change in terms of reselling, I guess, the other people's products or intelligence into your install base and taking a portion of that?

I think, first, it's a very early stage market.

I mean, when we've invested a lot of resources trying to find out what's the hottest range and what's the future in terms of preventing threats and fighting them, most sophisticated cyber attacks.

I think we built over the last couple years a great -- the entire infrastructure of ThreatCloud, driving threat information, of driving real-time prevention and I think that's very, very unique in terms of our ThreatCloud.

Drive several infrastructures that provide the threat information.

Most of them are not realtime.

Most of them are not being translated into immediate blocking of attacks and we've invested a lot in the last few years.

What we found out at the beginning of this year and late last year is that the new hot factor of companies is the companies that provide more in-depth intelligence and more specific intelligence.

I would say between 1,000 to 2,000 companies today in the world that specialize in that and what we found out is these technologies are really not technologies.

This intelligence is really, very segmented.

I mean, they are found in specialized certain industries.

There are some -- for example, solution industry is very big on that.

There are some that specialize in geographies.

The attacks that happened in certain nations or certain countries are different when the attacks are going elsewhere.

And I think our choice in that will be instead of trying to say that it's one-size-fits-all is to facilitate that in an open-space marketplace and allow every vendor to offer very intelligent from Check Point and allow every customer to get that.

Now that has two big, I think, revolutions in the marketplace.

One revolution is that it's translatable automatically into prevention.

Sounds trivial but absolutely not.

If your company would buy today a subscription into some securities -- type of security and intelligence service, you'll get every week dozens of pages, something more of that.

It would be interesting analysis and then there would be hundreds of signatures of IP addresses, of things you should block.

And I think that's what we got from our customers that told us we get all that information every week.

We don't know what to do with it.

We know it's important.

We know we want to block it, but how do we do that?

And that's where we start the integration with this intelligence services.

They are integrated into our Management and into our gateways and we can process all that information.

In terms of the select one revolution, the second revolution is that before that, the calling for so sophisticated, all of these vendors were trying to approach a small number of customers, very large customers.

And that enabled only a very small market, but every company had very small -- dozens of customers, sometimes not even that.

And I think what we are opening the door here is for every intelligence member to offer their services and their information to hundreds and thousands and in the future, tens of thousands of customers, which we have and can easily meet.

So we've got the two revolutions.

In terms of monetizing that, we are using the model when we share the revenues between us and the information providers.

The customers can determine what would like to subscribe to.

The providers themselves are deciding on the pricing and how much they'd like to charge.

So far I think we're just starting this quarter to enable it to the general public and to the general customers so that we've delayed the 577 release that we've released, which we're releasing.

But the enthusiasm on that is pretty high.

And I want to take a lot of time based on both the new technology and based on the fact that also it needed the new software from us.

Appreciate the color.

And then in and around the big deals, are most of these rip-and-replace types of opportunities?

Are you seeing any increased firewall use cases with incremental segmentation and networks are moving into virtual or anything of that nature?

Thanks.

I think we're seeing everything.

I mean, we're seeing more deployment of security technologies.

I think we're seeing deploying firewalls in different applications that we didn't see before.

We're seeing [outrig fire] infrastructure and we're seeing replacement, competitive replacements, few -- actually I think out of the three deals I mentioned, at least two, I'm not sure about the third one, is replacement of competitive drawbacks.

Thank you.

Philip Winslow, Credit Suisse.

Hi, guys.

Thanks, guys, and congrats on a great quarter.

Most of my questions have been asked, but I just wanted to dive into the verticals and just sort of what you're seeing by industry vertical, if anything is standing out in particular.

Obviously, there have been a lot of notable security breaches in certain sectors.

Curious if that's driving your growth in any of those or just sort of general demand across the board?

I think finance -- the financial industry continues to be strong.

I think I'm seeing an uptick and some nice successes in retail.

And I think I did mention hospitality which is less often mentioned sector but is an important one.

But I think we've also seen many, many successes in other sectors.

So the answer is yes.

We're seeing an uptick in different industries.

Got it.

Thanks, guys.

Karl Keirstead, Deutsche Bank.

Thanks, Gil.

On the competitive replacement front, last night Juniper reported a 50% decline in Legacy NetScreen product revenues.

I'm just curious if you're seeing any kind of uptick in displacements of Juniper and if that's driving your US performance at all?

Thanks.

We are seeing displacement of Juniper.

I don't know if it necessarily drives the US performance.

I think it happens all over the world.

I met with some customers last week in Europe and they were talking about that as well.

So I don't think it's a geography -- a geographical specific.

I think when we outlined -- we outlined a few deals right now and against -- who did we displace and who did we win against, I think it was very consistent with the market share of the established vendors there.

Cisco was number one in terms of who replaced.

Juniper was number two, and then there are all the others that obviously have smaller install base than Cisco and Juniper.

Okay.

Thank you.

Matthew McMinn, Goldman Sachs.

Hey, guys.

Thanks for taking the question.

A question on uses of cash.

Can you help us think through how you prioritize uses of cash between reinvestment in the core business and organic M&A opportunities?

And then incremental shareholder returns and more in light of the $3.6 billion in cash and equivalents on the balance sheet?

And then just secondly on deferred revenues, maybe a little more color you can provide on the increase in long-term deferred relative to short-term?

Thanks.

Okay.

I think we're looking at the best ways to roll and obviously, with our cash position, we have the financing to do that.

I think we keep looking on the attractive acquisition.

It's really hard to find them and there's not too many businesses that can integrate into our platform that would be applicable to all sizes.

There are a lot of interesting ideas in terms of start-ups and new innovation.

But again, it's unclear how many of them are applicable to the entire store base and in some cases, I think we are attractive.

In some cases, the fact that our market is pretty hot means that the evaluation are reasonable for the future of our deal represented by one company.

But we are pretty active in terms of looking for the right acquisition opportunity.

And obviously, we're continuing to evolve buyback problem -- buyback program based on the feedback from our shareholders.

I don't know about the priority today because we have the resources to do all of these things.

And as to the deferred revenue questions and obviously, you can see the growth was very nicely 14% growth; short-term increased by 11%.

And long-term increased more.

Remember long-term is smaller dollars so that percentage will be significantly more.

This quarter, as we discussed, we had quite a lot of large deals.

Some of them are multi-year.

Multi-year means that if we invoice them, then it's going to be presented as part of the long-term deferred revenue.

Great.

Thanks.

Matt Hedberg, RBC Capital Markets.

Yes.

Good morning, guys.

Thanks for taking my questions.

You talked a lot about application control being an important component of growth this quarter.

Is there a way to think about the penetration of that blade into your install base versus, say, IPS?

Most of them are still significantly north than 50%, right?

So in terms of potential, there is still much potential if you take the majority -- all the customers and you see how much was the penetration.

It's -- I mean, my guess at this point in time would be -- I don't remember.

I don't have the data in front of me.

I think it's somewhere around maybe 20%, 25%, for the large blades like the application control with IPS.

That's great.

And then maybe a quick one.

Threat Emulation has come up a couple times on this call.

I'm wondering, is there a way to think about the size of that market and maybe differently, is that taking share from the traditional firewall budget or is this net new spend that you're seeing from there?

Thanks.

The Threat Emulation is hard to say what the market size is to date.

It was not -- I think there's one company that had significant revenues in that and there's -- I think it's [not] part of the overall threat prevention market.

And I think overall, all these technologies are part of building the same infrastructure and fighting cyber threats.

And the market for threat prevention in general is starting to be quite sizable because I think -- I'm not very sure.

I think that we are the number one vendor in terms of size, given that our annuity bookings in that market alone, excluding appliances, excluding the platform, just with annuity software blades came at approximately $0.25 billion, the largest, I think.

So I think sometimes we may have a perception issue that people don't consider us as that.

But I think we are quite big in that space.

I think overall the challenge is to build the full architecture or the full solution rather than specialize in one technology or the other because in order to prevent -- to protect your enterprise, you need a multi-layered solution and multiple technologies, not just one.

Thank you --

Next question, Melissa.

Gray Powell, Wells Fargo.

Hi.

Thanks for taking the questions.

So we continue to hear a lot of discussion among resellers and other contacts just around the consolidation theme in network security.

With Check Point, how does it play out?

Are you seeing customers buy more expensive appliances with higher throughput and then signing up for more blades being offset by lower units?

Or is it a combination of both unit and blade subscription growth?

I think there are very different cases that do different things but the short answer is we are seeing a very, very nice increase with higher level appliances with more blades.

That's by far the biggest growth in every after marketplace.

I can say we're also seeing a lot of growth in small appliances with multiple blades which, again, is a great thing because you want to bring that technology not just to the datacenter.

You want to bring these technologies to almost every branch office.

Got it.

Okay.

And then another topic, if I may.

We're just seeing signs that companies are increasingly look to integrate next-generation endpoint solutions with network security.

How does Check Point think about that trend longer-term?

Do you see a need to augment your capabilities here or should we expect you just to partner with other companies on the endpoint side?

I think first we pioneered some of these ideas in the last decade and we've built a very strong foundation of integration between the network and the endpoint.

At that point, I would say these are -- it would look like not many people are doing much about them.

We have unfortunately -- I mean, we are doing a lot in that space.

We are more than happy to cooperate and we are cooperating with several companies in that space.

We have our own offering, which I think is the leading in this marketplace.

But I think still customers look at that and decide whether the anti-virus on the endpoint that seems to be network security and the anti-virus on the endpoint is one of them gets more technologies.

But very few companies are actually upgrading the anti-virus to a different technology.

As much as there are many interesting technologies to be implemented on the endpoint, the anti-virus is still the leading solution.

So I think this market today suffers from a lack of acceptance by customers.

Understood.

Okay.

That's very helpful.

Thank you very much.

Brent Thill, UBS.

Gil, just a follow-up on that question.

In the endpoint vendors have effectively declared [EV] dead and when you look forward, do you believe that there is a bigger revenue opportunity?

Many of your major competitors are making some pretty big claims that this market is going to open.

Is your view that -- as you mentioned, it hasn't opened.

BUt over the next year, do you see an opportunity that you think could be bigger?

And I'm curious if you could actually help us size the endpoint opportunity today for you.

Is there a sense of what revenue you can allocate to your endpoint today or is it too hard to look at in that split?

Thanks.

Unfortunately, I don't see that new vendors are going to displace their existing anti-virus vendors and unfortunately for us, because I think we have a lot of interesting technology.

It may be fortunate for the anti-virus vendors.

I think they are doing a pretty good job defending their endpoint position.

And there's many reasons to why they do that.

I think we are seeing a -- I think what's more -- I see a lot of potential in the new markets like mobility, like data security, which are still untapped.

I think these markets can generate a nice potential and I think because they are related to the endpoint.

Just it's maybe the new generation of endpoints are going to be more important than the previous generation of endpoints.

And one quick follow-up for Tal.

Just on the buyback, can you just bring us up to speed in terms of what still remains on the existing plan?

I think we're around $650 million -- we have enough for now.

I mean, we started this two quarters ago and I think it was -- this quarter, $194 million and the previous quarter maybe $175 million, so we still have enough.

Great.

Thank you.

Keith Weiss, Morgan Stanley.

Hi.

This is Melissa Gorham calling in for Keith.

Thanks for taking my question.

A question for Gil.

Just quickly, if you could maybe provide an update on the traction you potentially are seeing with some of your virtualized appliances, particularly around the partnership with VMware that I think you announced in the spring?

And then at kind of a high level, as the datacenter becomes increasingly more software defined, how does this open up opportunities for you all?

I think it's absolutely opportunities.

I think we've stressed in our cooperation with VMware and I think we're doing much better now in developing real solutions.

I think we've pioneered that market and I think we have a lot of advantages in that market given that our focus is in developing software that can run on any platform so we are doing a lot of that.

In terms of customers' adoption, it's still open.

I don't see that customers are in big adoption of virtualized security or follow the other types of securities and virtualized environments but maybe in the future.

We'll keep investing on that.

Okay.

Thanks.

And then just a quick one for Tal.

Did you disclose any significant FX impacts this quarter, either to the topline or OpEx?

Yes.

Obviously, topline is hard to mention because it's selling in dollars except for one location in Japan, but in expenses, it was an increase of the expenses of approximately [$2] million which means approximately $0.01 to the EPS.

Okay.

Thank you.

Scott Zeller, Needham & Company.

Hi.

Thank you.

Any thoughts on the public sector and federal for the third quarter?

The tone of spending (inaudible) in government?

Nothing much.

I think we've seen some successes in government accounts.

Public sector, we've seen some successes in education and so on.

I think in the first quarter, may be a little bit more challenging for that because it is sometimes the holiday season, especially in some of these sectors.

But I think overall, it's doing fine.

Thank you.

Thank you.

There are no further questions at this time.

I'd like to turn the floor back over to Mr. Meintzer for any closing comments.

All right.

Well, we thank you all for participating today with us and we look forward to talking to you throughout the quarter and we'll see you in October, obviously on another call.

Thank you, and we look forward to it.

Thank you very much.

Thank you.

Goodbye.

Thank you.

This concludes today's teleconference.

You may disconnect your lines and have a wonderful day.

Thank you for your participation.