Check Point Software Technologies Ltd (CHKP) 2014 Q3 法說會逐字稿

Greetings and welcome to the Check Point Software Technologies 2014 third-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you Mr. Meintzer, you may begin.

Thank you Manny.

Good day to all of you.

I'd like to thank you all for joining us today to discuss Check Point's financial results for the third 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 www.CheckPoint.com.

For your convenience, the conference call replay will be available through November 1. If you'd like to reach us after the call, please contact investor relations by emailing kip@CheckPoint.com or dialing us at plus 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's representatives will make certain forward-looking statements.

These forward-looking statements may include our expectations regarding introduction of new products and programs, and the success of those products and programs, our expectations regarding capital expenditures and future periods and our expectations regarding our business and financial outlook including our guidance for Q4 2014 and the full year of 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 Exchange Act of 1933 and Section 21E of the Securities and Exchange Act of 1934.

Because these statements pertain to future events, they are subject to various risks and uncertainties.

Actual results could differ materially from Check Point's current expectations and beliefs.

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

As 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.

Now, it's my pleasure to turn you over 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.

Our revenue for the third quarter increased by 8% year-over-year, reaching $370 million and coming in on the top part of the guidance.

Non-GAAP EPS grew 9% to $0.93 and exceeded the top end of our guidance.

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

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

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

In the third quarter of 2014, our revenues reached $370 million compared to $344 million in the third quarter last year, representing an increase of 8%.

Total revenues for product and Software Blades grew by 11% year-over-year.

This growth was driven by continued success of our Software Blades which grew over 22% and now represent 18% of our total revenues.

The main driver was the threat prevention blades including the anti-bot and threat emulations and application control blades.

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

Our software update maintenance revenues reach $177 million, representing 4% growth year-over-year.

Deferred revenues as of September 30, 2014 were very strong at $660 million, an increase of $93 million or 16% over September 30, 2013, similar to the end of June 2014.

Revenue distribution by geography for the quarter was as follows: American contributed 50% of revenues, Europe contributed 34%, 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 volume compared to 69% in the same period a year ago.

Number of customers with transactions over $1 million increased by 10% to 44 customers this quarter compared to 40 in the same period last year.

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

GAAP net income for the third quarter of 2014 increased to $161 million or $0.84 per diluted share, up from $160 million or $0.80 per diluted share in the same period last year.

Non-GAAP net income for the quarter was $177 million or $0.93 per diluted share, up from $169 million or $0.85 per diluted share in the same period a year ago.

Non-GAAP earnings per share were above the top end of our guidance representing 9% growth year-over-year.

Our cash balances were $3.656 billion at the end of the quarter.

Our cash from operation increased this quarter to $202 million from $195 million in the third quarter of 2013.

The increase relates mainly to strong collections.

We've also started a capital expansion of our headquarter office building.

We expect the investment to be approximately $60 million over the next two years and to be presented despite our cash flow from investing activity.

This quarter, we made a land lease payment in an amount of $7 million, which is part of our operating cash flow.

We continue implementing our expanded share buyback program during the quarter and repurchased approximately 2.8 million shares for a total cost of $192 million.

I will turn the call over to Gil for his thoughts on the third quarter.

Thank you Tal, and good morning to all of you joining us on the call today.

This was a great quarter, and we have a lot to be excited about.

We delivered 11% growth in a combined product and blades revenues and achieved total revenues at the high-end of our projection and EPS that exceeded our projections.

The quarter was characterized by better-than-expected business seasonality, especially in the North American market, where we continued to see strength throughout all of the summer months.

We continue to win deals in many segments of the markets.

Financial customers continue be the strong sector, but we also had major wins in retail, government and technology.

Software Blades continue to drive growth this quarter with 22% growth, with data center and the super high-end appliances contributing to the overall strength.

We've expanded our most successful product family, the data center family.

This family of appliances has been showing great strength and great growth over the past two quarters.

We are now making it even stronger with top models.

The 13800 and the 21800 appliances delivered high-performance and accessibility needed by demanding data center environment.

In this quarter, the first quarter of sales, we already saw great acceptance of the new models.

During the quarter, we received recognition by Gartner for leadership in mobile data protection and UTM for our completeness of vision and ability to execute.

And Gartner ranked us number one in firewall market share in the second quarter, continuing the trend.

Our threat prevention continued to outperform our technologies in the market space.

For example, if you look at our threat emulations technology, that technology takes unknown files being sent to the network, watches the behavior in a sandbox environment and determines if that is a malicious or innocent behavior.

These technology identified targeted attacks that have not been seen before.

Using this technology, we can identify zero day malware in minutes instead of hours that are needed for competing products.

Not only that with our products, that malware will never reach the network and will be completely blocked where another products will let the malware attack the network, create damage and will start blocking it after the damage has occurred.

Sometimes it will take hours, hours of damage that in many cases cannot be reversed.

You might think that that kind of malware is very rare and will never get to your organization.

In reality, when we look at the organization that deployed our solution large and small, we can see such files are identified several times a week in each organizations.

There are many more initiatives being executed at Check Point to advance cyber security.

We will review more this quarter and next year.

That brings me to the financial outlook.

You know my regular caveats.

It's always hard to predict the future, there are many factors that could point to better results, and there are many reasons to be cautious.

For the fourth quarter, we expect revenues in the range of $395 million to $430 million and non-GAAP earnings per share in the range of $0.99 to $1.09 per share.

GAAP EPS is expected to be approximately $0.09 less.

For the full year, that translates into revenues in the range of $1.47 billion to $1.505 billion with non-GAAP EPS of $3.64 to $3.74.

GAAP EPS for the year is expected to be approximately $0.30 less.

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

(Operator Instructions)

Walter Pritchard, Citi.

Two questions.

First for Tal, you had strength in the high-end appliance business here for 18 months or so.

Can you talk about what percentage of your product revenue the high-end appliance is?

The question is the percentage of revenue, product revenue, at the high-end of the market.

What does that percentage look like?

Those things were disclosed.

I assume you ask from our revenues, and I don't think we have disclosed that.

I will say it's probably a significant portion.

Less than 50% by significant portion.

Great.

And then, Gil, on your end, for the data breaches we're seeing -- lots of activity, can you talk about how you monetize that?

I know you have a couple blades, Anti-Bot, are you actually selling hardware and appliances -- ?

So the question is how are we monetizing the Anti-Bot, the Threat Emulations and are we selling appliances, are we selling software, are we selling blades, how are we doing that?

What I'm trying to understand is are you seeing it in the product revenue?

Understanding that the blades come through with that, but are you actually seeing people buying more hardware capacity to deal with those issues?

I think people do buy more hardware capacity to run the additional blades we have.

It's hard to account for that because when we look at that, we look at the overall system.

And we do account for the specific blades and the results of the Anti-Bot and the advanced threat prevention, especially the Anti-Bot but the prevention blade is pretty good with doubled year-over-year.

I think we're doing quite well with that.

I think there's a lot of contact potential still with these blades.

I think finally the Anti-Bot blade is catching up and getting to high volumes.

The other blades are still in the beginning.

Great.

Thanks for taking the question.

Sorry for the bad connection.

Thank you.

Shaul Eyal, Oppenheimer.

Good afternoon guys.

Congrats, solid quarter.

Tal, any major impact, foreign-exchange this quarter, actually accelerating dollar versus the Israeli shekel?

Not this quarter because remember, first we hedge our PML, so for the end of the year, we are still hedged.

Hopefully the next year it's continues to go that way and therefore it will be in our benefit.

Got t. Okay.

Fair enough.

Can you guys talk about the Threat Emulation key solution of high-profile sector right now?

How big is that relative to the overall blade business?

How big could it potentially become down the road?

I think we have a great blade with that, and I have described in my spread a little bit of the results we are seeing.

I think we're seeing terrific results with that blade.

We have some of the most advanced technologies in terms of analyzing who published earlier this year what we call the missing 300, which shows we take even the known malware, make slight modifications, slight mutations to it but still keep it the same malware.

And when we are able to detect close to 100% of the modified malware, our supposedly Threat Emulations solution missed the majority of that which seems to some problems in their behavioral ability.

I talked today about the timing.

I think in many cases we are 10 times faster in identifying that threat, and 10 times faster here means and other products that means that hours with the network is exposed to targets of attack.

In our case it's zero because we don't pass the file until we actually analyze it.

I think we have a lot to offer on that front.

We have customers from all different sectors, large and small, and when we are actually analyzing the results we're seeing that we detect this zero day or zero minute, zero second malware, and we're all getting it.

It's not something that doesn't occur; it's something that occurs multiple times a week.

I think we're still in the beginning in terms of getting that blade to many customers and monetizing it, but the potential looks very promising, and I think we will work very, very hard to show its benefits to customers.

How would you rank it in terms of the overall blade?

I know usually you talk about improving prevention being number one and application control, I believe being second.

Is that already third, fourth-ranked?

I think it's still not third, but hopefully it will make this place next year.

I think Anti-Bot together with Threat Emulation is between fourth and fifth place.

It's moving up nicely.

Got it.

Thank you very much.

We have control and IPS which are a very big end of it.

Got it.

Thank you.

Michael Turits, Raymond James.

Thank you guys.

A couple of questions.

First of all, it seems like you had some particular strength in the increasing long-term deferred.

Were there larger contracts signed?

And my other question is it seems that there's a slight increase in revenue growth rate in Europe.

I was wondering if you would comment from the bookings perspective how the geos did?

The first question on deferred revenue, yes.

Obviously if the long-term deferred revenues increased with a few nice large deals.

Every quarter we have long-term contracts; this quarter we had slightly more, so that's good news.

It came from different verticals.

Like you say, financial vertical was very strong as usual, so some of it's relating to that.

Your question about booking if I understood your question, Europe booking was good in Europe.

It was much stronger in America.

America led the growth.

As you know it's consistent with the last probably year, year and a half.

America is a very nice growth for us, and we see across all regions around the US.

If I could squeeze one more in, Tal.

The tax rate lower-than-expected this quarter.

Anything you can help us out with in terms of expected tax rate for next quarter and into 2015?

It remains the same as always.

I should be about 20% or 21%.

I'm talking about the non-GAAP.

GAAP obviously can change depending on the deferred taxes, but in general non-GAAP should be around 20% or 21%.

Great.

Thanks very much.

Philip Winslow, Credit Suisse.

Thanks guys and congrats on a great quarter.

Obviously touched on the increased attach rate of new blades to the sales.

I wondered you can comment on the trends you're seeing the renewal rates for the blades, and then I just have one quick follow up question on that.

Yeah.

I would say we've seen, the Software Blades remain the same around 35% or 40% renewal rate.

The unbundled renewal rate continues to increase so right now is slightly higher than 70%, which is exactly what we try to do to increase the renewals in the blades.

It's part of the reason why we see such a nice growth in our continued Software Blades.

Got it.

As you guys contemplated your Q4 guidance, obviously there's been a lot of noise out there on the macro side with EMEA, Latin America and other regions.

I just wanted to get a sense for what you baked into your Q4 guidance in terms of your conversion rates versus historical levels and anything by geography, et cetera.

I think we do the fencing, but when we do, we were looking at our line were looking at the strength of the previous quarters.

And then I think based on that we based our guess, because let's remember, projection at the end of the day as much as we do it in a very analytical and methodological way, it's still in many cases a guess.

And I think we feel pretty good about fourth quarter right now.

The last two quarters were terrific.

I think we were ahead of our plans in most regions, and there's no reason to believe that will stop in the fourth quarter.

Great.

Thanks and congrats again.

Matthew McMinn, Goldman Sachs.

Thanks for taking the questions.

Congrats on the quarter.

Just one on the uses of cash and capital allocation.

I guess with $3.7 billion of cash and equivalents on the balance sheet, continued cash flow generation, can you give us your latest thoughts on how you prioritize uses of cash?

I just had one on margins as well.

They were stable year on year this quarter, despite comments indicating higher sales and marketing spend.

So just want to understand why sales and marketing was down sequentially and how we should think about that in 4Q?

Thanks.

I would just answer -- Gil will expand more the business side, the financial.

In Q3, typically sales and marketing is lower than Q2 as a result of the fact that Q2 is when we have the majority of our events like Check Point experience and our sales kickoff.

You see a regular expected seasonality.

That is your second question.

The first question was relating to?

Uses of cash.

With the $4 billion, how do you prioritize uses of cash?

So, as you can see we continue with the buyback program of buying approximately up to $200 million.

We don't accumulate really cash anymore.

We distribute pretty close to our offering cash flow.

As you can see this quarter and in the previous quarter as well.

The rest of the cash as of now we would like to continue a dedicated for potential future M&As and acquisitions.

And has anything changed on that front in terms of what you're seeing out there on M&A opportunities?

If I look at the way I feel about it, I feel that we're seeing a little bit more interesting acquisition opportunities.

I think maybe the investment, that we have made during the last two or three years are bearing some fruit, and there are more interesting companies.

It doesn't mean anything will materialize or that anything big is expected on that, but my feeling from looking at the last few months is that there is more interesting companies that are target for M&A these days.

That's very helpful.

Thank you.

Robert Breza, Sterne Agee.

Hi.

I had the phone on mute for a second.

Morning.

Congratulation s again on the quarter.

Gil, I was wondering if you talked to the pricing environment and maybe to the competition a little bit.

Especially as a geographies in Europe rebound here, it seems like I'm just interested to get your perspective here on what you're seeing competitively and more specifically from a pricing point of view.

I think we've always been in a competitive environment and I think we have a lot to offer in that environment.

And many customers are realizing that.

Having said that, I think we have a very tough competition on different fronts.

Some are maybe over hyping solutions, some are competing very well on the price and they're discounting a lot and are very aggressive on that.

I think overall we are doing quite well.

Our pricing remains relatively stable in light of very tough competitors.

I think more and more customers do realize the benefits of our platform and a broad range of security technologies which we have been in.

The big, big strength of our management, security management solution I think you will find every customer and every partner or reseller saying that our management is superior to any solution in the marketplace.

I think we will keep our efforts to show that and to do better this quarter and next quarter.

I think so far we've been doing quite well and the last few quarters have shown very good results.

Maybe just one quick follow up.

From some of headlines coming out on the new services here show that your guidance -- could you just repeat guidance?

I think you said $395 million to $430 million, is that correct on revenue?

The revenue for the fourth quarter is $395 million to $430 million.

EPS guidance has an expectation of $0.99 and $1.09.

Perfect.

I just wanted to clarify.

Thank you very much

Gregg Moskowitz, Cowen and Company.

Thank you very much.

Gil, overall your large deal activity increased again, and I think last quarter you noted a significant uptick in larger deals from new customers.

How is the third quarter in that regard particularly with new customers?

I think it went quite well.

We had, again, let's remember third quarter is not the large quarter deals.

It's usually the fourth quarter and sometimes the second quarter, but seasonality starts when people start the year, finish the deals in the second quarter and then they go on summer vacation and close large deals in the fourth quarter.

Having said that, we still had a very nice number of large deals in the third quarter.

We had a few deals that were really very large, not just seven digit deals but even a deal that is larger than that in an interesting sector.

So I think overall -- and we had large distribution, so it's not that there was one large deal or two or three large deals that skewed the quarter.

It was very diversified.

Overall I think the trends we have seen before have continued.

It's very positive especially towards Q3.

Okay.

Terrific.

And I wanted to circle back if I could on Threat Emulation.

We continue to get really strong technical feedback on the blade from the channel.

Based on your remarks, it sounds ike it's beginning to contribute but it has been GA for over a year.

And it sounds like the contribution to bookings is probably still very low.

Is there something that potentially is holding it back or are you guys spending enough on marketing?

Are the sales incentives sufficient?

I'm curious to get your thoughts on this and what can really potentially energize that blade.

Thank you.

I think what we've seen in the past is that it takes us some time to get blades ramped up to speed.

I think it's been before with the Anti-Bot blade.

It's taking us a little bit time now with Threat Emulation.

First I do think we can do better in the sales and marketing.

I think we can be more aggressive on that we're planning to be more aggressive with that.

I think the second factor is mainly that we have a very large installed base, and for them to move to the latest release, usually the latest blades and the latest technology require the latest release of software takes a long time.

I think that's one of the things holding us back in large environment.

The customers already own Check Point, they already love Check Point, they are willing to experience with it, willing to utilize it.

But unfortunately in many cases it takes them months and sometimes even multiple years to upgrade a version because they have a very large Check Point, something that might be holding us back a little bit and I think we're also try to deal with that a little.

By the way, I think that means that many times the opportunity opens like a year or a year and a half later, and then it's going to take off nicely like we have seen in a few blades in the past.

Perfect.

Thank you.

Sterling Auty, JPMorgan.

Thanks.

Hi guys.

So, in terms of your solution, when you think about the blade, how is the blade in terms of adoption as a single blade versus as part of a bundle?

Maybe expand that wider.

As you look at the blades revenue how much of that revenue is coming through bundled blades versus standalone?

Are you talking Threat Emulation or in general about the blades?

Start with Threat Emulation then expand the same question to the broader blades.

The Threat Emulation today is almost completely standalone blades and add-on blades.

All of our success on a standalone basis.

The other blades are offered in many cases in packages.

We have the next generation viral package and the next generation threat prevention package.

Some packages are bundled with the new appliances and some are not.

The majority of the blades revenue today is not coming from the ones that are bundled with new appliances.

It's coming from renewal, coming from customers or completely unbundled.

So it's coming from customers that have complete choice and they choose to implement these blades.

And that's good news because when you bundle things together, you can see great results.

But it doesn't always hint of what the real customer demand was for that.

So the vast majority of blade revenues today is coming from the packages that are purchased on the standalone or are being renewed.

That is the good news.

Again, it took us a few years to get to that new stage, but today we are there and that's very good sign.

Okay.

And then a different area.

Gross margins I think 88%, was looking at it quick, I think this might be the lowest since the fourth quarter of 2011.

What impacted it especially on the product side, and what should we think about gross margins, this is about and it's a little bit better or is it at this level?

I think you should look at it like I would say, it can go 1% or 2% up or 1%, 2% down.

It depends on the mix This quarter we had slightly higher mix of third-party equipment which carry slightly lower margin in the gross profits.

I would also like to reiterate the point that I think we have a pretty healthy margin.

Our focus is how to provide better solutions to win more customers, to grow the revenues, grow the bottom line.

It's not focusing on managing the margins.

Not the gross margin and not the operating margin.

It's how we grow the business in a healthy way.

That's the way you should look at it up to now and looking forward.

Okay.

Tal, can you just remind us which of the products have the third-party hardware so we can -- when you talk about success in different parts of the product line we can understand without mix is?

Sure.

You have like IBM, HP, Fujitsu, Crossbeam and so on.

Bluecoat nowadays.

But in other words, is that focused, the 21,000 series or across the product line?

That's the 21,000 with our clients, and I think we are in many cases integrating for the customers other types of solutions like Tal mentioned, with IBM, HP, Bluecoat, Fujitsu and even sometimes a few others.

That's the small part of our business.

The vast majority of our business is Check Point appliances and that have a slightly higher margin.

I got you.

So no longer a meet in the channel like it used to be where the software would be loaded up.

You actually take some of that hardware revenue through to your income statement at this point even though it's small.

Ages ago actually.

No.

That happened a long time ago, and almost all of our sales -- the software, standalone software portion of our revenues is, I don't know, it's stable and becoming smaller and smaller as a percentage.

Let's put it that way.

Is not shrinking dollar wise, but it's shrinking as a percentage of the revenues.

And most of our revenues today are integrated system using our own appliances, 2000 series, 4000 series, 12,000, 13,000, 21,000, 61,000, all of the different appliance series that we have that's our own appliances.

All right.

Thank you.

Matt Hedberg, RBC Capital Markets.

Thanks for taking my questions.

Gil, I want to get your perspective on the identity and asset management market.

As apps move increasingly in and out of the network and through a hybrid cloud architecture how do you think about that market progressing?

I think it's very interesting market.

I think it's a market that for many years has the potential, and the cloud is definitely creating more potential.

The big challenge in this market is it's usually a very customizable solution.

Every company has a very different mix of vendors, solutions, identity.

And that's where it usually becomes a niche market for a large-scale customer that are willing to do a lot of customization when we are usually excelling in markets that are more-based solutions, large customers, small customers, mid-sized customers that have less customization, almost no customization to the products.

I think that's maybe one of the reasons we're not a big participant in this market.

I think it's still a very interesting one.

That's great.

That' s very helpful.

Maybe broadening out a little bit more, lot of your competitors are talking about the end point market more broadly there.

I'm just curious to get an update on how you think about a more brought end point strategy?

First I think there's a lot of talk about endpoint, but there's very little things going on with that.

The traditional antivirus vendors are still controlling the endpoint.

There is some, again, I don't want to get into that discussion now, it's too long of a discussion but there are some good reasons for that.

Three some very interesting technologies that can be brought to the markets, but customers are not very excited to install things on tens of thousands of endpoint.

The real story is very different.

The real story's very different.

You can use some endpoint technology to detect small threats, block more threats, but realistically the clarification and move to more Internet, the move to more advanced threats and move to the Internet of things actually requires stronger perimeter solutions.

Today you will have so many devices on the network and you can absolutely not put the latest endpoint software on every device like that.

Remember, it's not just the PCs on the network, not just updating old servers which is also very important.

It's about every printer and every temperature control device on your network and many, many devices that we don't even talk about.

All networks but also office environment, set-top boxes, cable boxes, all of these things are now connected, and the threats will go to any device they can go to.

These devices cannot be protected on the endpoint; these devices must be protected by the perimeter solution.

I think the real truth is to protect against the most advanced solutions, it makes a perimeter solution even more important than it was 10 or 20 years ago.

Having said that, there is still a lot of potential inside the network.

You can use the endpoint agent for better dissection and I think that's something we're doing and something that we're doing more cooperation between endpoint and the network.

And it is definitely the need for multilayer security solution because when you are mobile, you're not always behind the perimeter.

But in the big sense of the network, the perimeter is becoming stronger and stronger.

More and more important.

Also stronger because we're seeing all of the new technologies and that's more important.

That's great.

Very helpful.

Thanks and congrats on the quarter.

Gray Powell, Wells Fargo.

Maybe just a couple of questions.

Obviously Check Point is one of the companies driving the consolidation of standalone appliances into it a feature on next generation firewall.

At a high level, what do you think happens to the standalone markets like IPS and secure Web Gateway's as they become features on one appliance, and how does this impact the overall growth of network security?

I think overall there is a consolidation.

I think there's still room for some of that, and some of them have a big install base that are continuing and not disappearing overnight.

But I think overall the trends we are seeing are the trends of consolidation, more functionality to tie themselves into the Gateway, the modern firewall, the thing we're producing.

And I think we've seen that with IBM as an example which was a very promising standalone industry 5 and 10 years ago, and today the majority of that industry is inside the Gateway.

I think, again, I don't want to spoil or say bad things that might hurt companies that may not even be our competitors, but I think overall customers like the consolidation and the consolidation is happening.

In some cases it's happening faster and in some cases is happening slower, and in some cases we will see entire industries go inside the main gateways.

And some may survive and still be a healthy industry, but smaller than the consolidated one.

I think that has helped a little bit the growth rate of the overall metrics security market.

The growth rate of the Gateway.

Not growth rate of the overall industries because there are a lot of cost benefits from consolidation.

Got it.

That's very helpful.

Maybe one more if I may.

Clearly, there's been a lot of headlines both in retail financial services lately.

Are you seeing a permanent shift in the way companies allocate security budgets?

How stable do you think this improved spending environment is?

I think we are definitely seeing a change.

I would say -- I would characterize this way, we're seeing the biggest change that I've ever seen in my career in terms of budget shifting as a result of what's happening in our world.

Still that change is much slower and much smaller than you'd expect when you read headlines.

When you read those companies talking about the critical need of cyber security in the companies, governments, everybody thinks about that.

When you watch the TV every night and see that and you compare it to the change of budgets, they do not correlate.

Having said that, we have seen some changes.

We have seen some changes.

A year ago in Q4 last year was the big incident in Target that showed the retail industry how it can be a target for attacks.

Over the last two or three quarters we have seen major wins in the retail industry.

Very large wins.

That means the priorities are changing and budgets are shifting.

The financial industry has been the large consumer of security technologies, but when we analyzed our data, it showed it became an even bigger one.

Is growing faster than our industry in terms of consuming our solutions.

Very clearly focused on companies and very clearly there's a change.

I would say more moderate than you see in the printed news and stronger than what I've seen before.

Okay.

That's really helpful.

Thank you very much.

Daniel Ives, FBR.

Just one question.

In terms of budgets, security from multiple decades.

Does it feel like, you said the shift is slower, are you seeing a lot of deals in the pipeline that maybe you thought were $400,000 or $500,000 deals and now there $1 million plus.

Are you seeing a massive elevation of the size of the deals in the pipeline?

Just what's going on ain budgets, secular, from a product perspective?

We do see larger deals.

You can see just by the increase customers are buying transactions that are higher than $1 million.

Q3 like Gil said is not quarter for big deals; even that increased 10%.

And the size also increased.

You can see transactions bigger than the $50,000 increasing another 3% this quarter.

Yes, the sizes of the transactions are increasing.

I think it's also we've seen nice refreshing cycles of large networks.

Gil talked about the few nice transactions we had in the retail.

We had very nice transactions in the financial industry as expected.

Larger and larger transactions.

Definitely.

Got it.

And then of the $60 million on the new facility, how much of that is for Kip's office?

Thanks.

I don't have a permanent office in Israel.

I'm a floater.

Okay.

I was just wondering.

The number seemed high.

I'm just wondering if it had an impact and that would be your new office.

We actually have a beautiful tent outside.

(laughter)

I spend time in the tent.

Next caller.

Karl Keirstead, Deutsche Bank.

I wanted to return to the fourth quarter guidance.

The high-end at $430 million implies 11% growth.

That's a pretty good acceleration, and that would be the highest growth rate since Q1 2012.

Gill, I know you mentioned that you feel pretty good, but this high end of the guide seems to signal a real confidence shift in the business.

I wanted to ask if that's the correct interpretation and if that confidence extends into 2015.

And then the other part of my question on 4Q guidance, just EPS range of $0.99 to $1.09, a $0.10 range.

I know you like to keep it wide for the fourth quarter but seems relatively wide and I'm wondering if there's any key variables that are causing you to want to keep the EPS range relatively wide?

I think first we look the midpoint of the range, which both of them are slightly higher than the analyst expectations at this moment, you can see they are around 7%.

I think it's at the higher part of the range that we provided in the beginning of the year we talked between 4% growth to 8% growth.

Midpoint is 7%.

You can see we feel better than when we provided the guidance in the beginning of the year.

When you look at the low point and the high point is more our safety margin.

Yes, if everything would be great that we can be at the higher end, and if they would be lower results, we could be at the lower end.

I would give more weight to the midpoint and the fact that the range is wider because of the fact that it's Q4 and these are large numbers.

Okay.

Got it.

That's helpful.

Thanks a lot.

Brent Thill, UBS.

Tal, back to your comment about America's growth.

That was one of the best growth quarters you had in a while.

But if you go to Asia and Europe, it's been a lot more inconsistent.

I'm just trying to understand with the rising tide that seems to be lifting all boats in security, why do you think the other feeders are not doing as well?

I understand macro environments, but I think we are seeing other vendors doing well in those theaters.

What you think is holding you up in those territories?

First I think we are doing well in those.

I think it's less consistent or less stable in the US.

One reason is by the way of the facts that these are much less uniform market.

The US itself is a much more uniform market than -- one single market.

Of course US is huge and as many variations, but the US as an economy behaves in the same way.

When you look at Asia or Europe, there are dozens of different economies with different behaviors, and in terms of our execution, it's completely different execution.

Winning in Japan and winning in India is completely different, the way to manage the team, the stage of the market is completely different in each one of them.

That is the same case is true within Europe.

One country in Europe can show great results while the other economy is in recession.

This year we have actually seen the European more stable than before, but in previous years we have seen parts of Europe almost in bankruptcy while other parts are doing well.

I'm taking that analogy and saying that in our macro environment managing two different countries in Europe is two different management challenges.

It's really a lot.

I'm just looking at Europe and Asia as one region is a bigger issue, and let's put it that way.

We got something right in the US going on for many, many years.

If we got something right in one country in Asia, the next challenge is to get something right in a different country.

Okay.

That' s helpful.

Gil, just want to go back to your comment about your eyes opening a little wider around the potential for M&A.

You have been very disciplined over the past several years you probably have done a lot less than we all thought you would do.

What is the trigger now for you to reengage at this point considering where some of the multiples of some of these private companies have gone versus a ways back?

I think not a lot has changed.

What I mentioned, what I have seen is that some, maybe the big amount of investments that happen in that industry, maybe it's a little bit of the fact that you look at the whole subject in cyber today, they are now becoming two, three, four years old subject.

And that means there is better room for new entrepreneurs to create companies, to create technology, and that technology is starting to mature from the standpoint, maybe tiny companies with no revenues but still they are answering the real problem, they have real technology, they have innovative technology.

From my feeling I saw in the last few months more companies that I have seen before.

I think the main reason is the type and the investment in that.

If you look at all of the hottest, latest cyber threat technology investments, most of these companies probably started in the last between year or 3 to 4 years.

That's usually a good time to see what technology starts to come out in the marketplace.

Manny, next question please.

Jonathan Ho, William Blair.

The product revenue looked really strong this quarter.

Can you give us a sense of how unit volumes actually grew relative to that product growth?

We don't provide it, but I can tell you it grew very nicely.

Main growth came from large appliances.

If you remember we have small, medium, large, high and superhigh.

We are increasing large appliances, we've increased in the super high-end and also in the -- Overall they grew quite nicely and provided most of the growth this quarter.

Got it.

Cisco has recently come out with a few announcements around potentially refreshing their products with source fire.

Any thoughts terms of how this could impact the market or any changes around the competitive landscape?

It's very hard to predict that.

I think I'm glad Cisco is also seeing the renewed potential in the security space.

That's an indicator of the overall interest and the overall strength of the market.

Cisco has always been a strong company in the marketplace.

I think in the last decade they weren't -- maybe more than the last decade -- they weren't the leading vendor in terms of the advanced technology.

To be honest, I don't see that changing very quickly.

Even though again we always have to watch out for that.

Got it.

Than k you.

Tal Liani, Merrill Lynch.

Great quarter.

Thank you for taking my question.

This is actually Mike Feldman on behalf of Tal Liani.

I have a quick question on virtual appliances.

What trends are you seeing on the virtual appliance front?

I think you talked about demand as well as the sales contribution, that would be helpful.

And maybe your strategy going forward in terms of new offerings.

Thanks.

I think we're seeing it's a very interesting subject and a hot subject to talk about appliances in the cloud, securing the cloud environment.

And we're seeing more recently strengthen our relationship we VMware and came up with a few interesting announcements.

Some came out in the VMware show in Barcelona two weeks ago, and there will be more in the near future.

Revenue wise it doesn't generate a lot.

It is still relatively small.

Thanks.

We have no further questions at this time.

I would like to turn the floor back over to Mr. Meintzer for closing remarks.

Thank you Manny.

I just wanted to add one clarification on the guidance so we make sure everybody got it.

For the fourth quarter we expect revenues in the range of $395 million to $430 million and non-GAAP earnings per share in the range of $0.99 to $1.09.

GAAP EPS is expected to be $0.09 less.

With that I would like to thank you all for joining us on the call today, and we look forward to seeing you throughout the quarter.

Take care and have a great day.

Thank you.

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

You may disconnect your line at this time and thank you for your participation.