Check Point Software Technologies Ltd (CHKP) 2014 Q4 法說會逐字稿

Greetings.

Welcome to the Check Point Software Technologies' fourth-quarter and year-end 2014 conference call.

(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.

Thank you.

Mr Meintzer, you may now begin.

Thank you, Rob.

I'd like to thank all of you for joining us today to discuss Check Point's financial results for the fourth quarter and full year 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 February 5.

If you would like to reach us after the call, please contact Investor Relations by e-mailing 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.

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

These 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 include, but are not limited to, statements related to Check Point's expectations regarding business financial performance; customers and products, including its expectations for product introductions and enhancements in 2015; our expectations regarding expanded investments and hiring across the organization and effects on the introduction of new products and programs as well as the success of those products and programs; our expectations regarding capital expenditures in future periods as well as the shareholder repurchase program; and our expectations regarding our business and financial outlook, including our guidance for Q1 2015 and full-year 2015.

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 are contained in Check Point's earnings press release, issued on January 29, 2015, which is available on our website.

And other factors and risks, including those discussed in Check Point's annual report on Form 20F for the year ended December 31, 2013, which is on file with the Securities and Exchange Commission.

Check Point assumes no obligation to update information concerning its expectations or beliefs, 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'll just say that I'm a bit under the weather, so if you hear a cough in the middle of the call, everything is fine.

I'm just a bit sick.

I'm very pleased to begin the review on this great quarter and an excellent year.

This quarter, we had good results, which came in towards the top end of our guidance, as we continued to demonstrate solid growth.

Our revenues for the fourth quarter increased by 9% year over year, reaching $421 million, while our non-GAAP EPS increased by 10% to $1.07.

Before I proceed further into the numbers, let me remind you that our fourth quarter of 2014 GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets, and the related tax effects.

2013 GAAP financial results also include the impact of the tax settlement with the Israeli tax authorities.

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 fourth quarter of 2014, our revenues reached $421 million, an increase of 9% compared to the same quarter in 2013.

Total revenues from products and [softo blades] grew by 10% year over year, with continued success in are super high-end and Data Center appliances on the one hand, and nice, double-digit growth in our small appliances, the 600 and the 1100.

Our Software Blade continued to show strong growth of 20% and represents, now, over 17% of our total revenues.

The main drivers were the application control, Anti-Bot, DLP, and our new Threat Emulation.

Our software updates and maintenance revenues reached $186 million, representing 7% growth, year over year.

Deferred revenues as of December 31, 2014, were very strong at $784 million, an increase of $112 million, or 17% over December last year.

Sequentially, the deferred revenues increased by 19%.

During the quarter, all geographic regions showed nice revenue growth.

Revenue distribution by geography for the quarter was as follows: the Americas contributed 48% of revenues; Europe contributed 38%; and Asia Pacific, Japan, and Middle East and Africa, the rest.

From a deal size perspective, we continue to see strength in our large deals.

The number of customers with transactions over $1 million increased by 13% to 85 customers this quarter, compared to 75 in the same period last year.

Transactions greater than $50,000 accounted for 71% of total order value, similar to last year.

Our non-GAAP operating income for the fourth quarter was $247 million, an increase of 9% compared to last year.

GAAP net income for the fourth quarter was $186 million, or $0.98 per diluted share.

As you recall, in the fourth quarter of 2013, we reached a settlement with the Israeli tax authorities relating to [trapped] profits [and prior taxed years].

The settlement has a positive $15 million net effect on our GAAP P&L.

Excluding these effects, our GAAP net income for the fourth quarter of 2014 increased by 4%.

The effect was eliminated in our non-GAAP net income for the fourth quarter of 2013.

Non-GAAP net income for the quarter was $203 million, or $1.07 per diluted share, up from $192 million, or $0.98 per diluted share, in the same period a year ago.

Non-GAAP earnings per share were at the top end of our guidance, with 10% growth year over year.

Our cash flow operation increased this quarter to $210 million.

Net of all tax payments, including tax payments relating to the settlement, our cash flow from operation increased by 4%.

Collection continues to be strong.

We continued implementing our share buyback program during the quarter and repurchased approximately 2.62 million shares, for a total cost of $195 million.

Now, let's take a look at our FY14 highlights.

2014 was a great year for us, with revenues and EPS coming in at the top end of our original guidance for the year.

Our revenues were $1.5 billion, an increase of 7% from last year.

Non-GAAP EPS was $3.72, an increase of 8% compared to $3.43 last year.

This year, we have experienced an acceleration of our growth rate.

Our products and Software Blade increased by 10%.

Our growth in product came mainly from the super high-end and Data Center.

Software Blade continue to be significant driver of growth, delivering over $265 million revenues, reflecting 22% growth and reaching 18% of our revenues.

Software Blade incorporate our new technologies, including the Application Control, Anti-Bot, Threat Emulation and Mobility Blade, which embody a significant future growth opportunity for us.

For the year, cash flow from operations was $753 million.

Excluding net tax payments, our cash flow from operation of 2014 increased by 5%.

Cash balances reached $3.683 billion at the end of the year.

In 2014, we repurchased approximately 11.2 million shares, for an aggregate amount of $765 million, which represented an average repurchase per quarter of $191 million.

We believe that our market leadership and long-term growth prospects make this an attractive time to continue further utilizing our crash to increase shareholder's value.

As such, we have announced today an updated buyback plan, effective immediately, to repurchase up to $250 million a quarter, a 25% increase compared to last year, and up to an aggregated amount of $1.5 billion for the whole plan.

The quarterly amounts may vary.

Now let's turn the call to Gil for his thoughts on the fourth quarter and next year.

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

We concluded 2014 on a high note or, should I say, notes.

We delivered revenues in non-GAAP EPS at the high end of our projections.

Software Blade continued to drive growth this quarter, while Data Center's super high-end, as well as small business and branch office solutions, contributed to the overall strength of the quarter.

The combined software product and blade revenues posted a double-digit performance, with 10% to [grow].

Software Blade alone contributed to 20% growth.

The challenge of cyber security has also continued to grow in 2014.

Attacks on one company in 2013 has evolved into multiple attacks on multiple companies in the same industry, as we've seen with attacks across the retail industry.

Financial institutions continue to be a target of many major attacks.

While major publicized attacks are growing, the reality is that everyone is experiencing threats and attacks.

Studies show that 74% of organizations have detected at least one malware attack on their infrastructure.

Mobile devices are also a major target for attacks and are becoming the backdoor to the corporate network.

New types of malware are being revealed, and this next-generation malware is more sophisticated than previous generations.

In many cases, this malware is more effective at hiding, which is polling more things so every instance of the malware looks differently.

The new malware is often programmable and can be operated remotely.

We've seen some high-profile damage inflicted by this next-gen malware, yet the awareness of these new types of malware is still low.

We've been focused on addressing these new cyber security challenges [of advanced] threat and mobility.

During the year, we've demonstrated our innovation and commitments to these areas; we've opened the IntelliStore, our platform that allows organizations to receive intelligence on specific and focused security attacks relevant to them.

And now the demonstration of our capabilities in preventing cyber threats is the Miercom test performs on [send volkings] or threat emulation technologies.

The test was completed utilizing unknown attacks that were run against four different vendor products.

Our threat emulation product came in first, with 100% catch rate.

This result was significantly ahead of the competition, which delivered disappointing catch rates of 70%, 62%, and 27%.

The disparity of these test results are not revealed; this is only one of the ways we're addressing advanced threats today.

Our security research team continues to analyze all kinds of cyber connected products in order to better secure her access to the Internet.

This industry-leading security group has identified several critical vulnerabilities in the last year, from mobile operating systems and applications to security and infrastructure devices.

Just last month, we revealed the misfortunate cookie security vulnerability in home routers and internet modems.

This vulnerability is one of the most widespread vulnerabilities found in recent years, with more than 12 million devices identified and exposed to these attacks from the Internet.

Mobility is a [seconary of] focus, as we look to make [operating] and iOS devices secure.

Last quarter, we introduced the Check Point Capsule, a revolutionary solution to address the needs of mobile securities, allowing enterprises of all sizes to secure their mobile traffic and create secure connections to the enterprise network.

In addition, it provides a secure [works] for some mobile devices.

And most importantly, it is designed to provide end-to-end data security.

All documents are encrypted when they are created, classified according to the relevant group, and shared on all mobile and non-mobile devices securely.

Sounds complicated, but we made it extremely simple and, in most cases, it requires fewer intervention by the user.

The system is designed so the document is created secure and remains secure without a single touch by the user.

In the coming months, we'll be expanding our already extensive platform with the introduction of [RAP].

We've incorporated many new capabilities in the latest generation of our management platform.

Server helping organizations consolidate the security infrastructure and manage it much more effectively.

NSS Labs have already highlighted the Check Point solutions require half [that] administration hours than competing products.

With the introduction of [our 80] unique capabilities, we should be able to achieve greater efficiencies for our customers while providing better security and better consolidation of security solutions.

With 2014 behind us, we look forward to 2015.

We believe heightened awareness of security in the marketplace is a great opportunity to further expand our industry footprint and capture leadership in these additional marketplaces.

As a result, we intend to significantly increase our organizational investment, mainly for accelerated growth of our development, sales, and marketing teams to capitalize on expanding security market opportunities.

We expect this will allow us to accelerate the introduction of [few] and innovative products to market as well as increase our coverage of [partners] and customers.

This should, thus, enable to further drive the adoption of our industry-leading solutions.

This investment will be front-end loaded, and we anticipate these investments will bear fruits toward the end of the year or early 2016.

Our sales [staff] is very excited with the expanded opportunities that we've [been present how to].

This brings me to the financial outlook.

You know my regular caveat; it is always hard to predict the future.

And there are many factors that can lead to outperformance or underperformance that must be taken into consideration.

With that said, for 2015, we expect revenues in the range of $1.6 billion to $1.65 billion.

Non-GAAP EPS is expected to be in the range of $3.90 to $4.02, based on an expected diluted share counts in the range of the184 million to 186 million fully diluted shares.

GAAP EPS is expected to be approximately $0.35 less than that.

For the first quarter, we expect revenues in the range of $360 million to $375 million and non-GAAP EPS in the range of $0.89 to $0.93.

GAAP EPS is expected to be approximately $0.08 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)

Our first question comes from the line of Walter Pritchard with Citigroup.

Please proceed with your question.

Tal, first question -- just looking at the numbers.

It looks like you've reclassified or moved around some product and license revenue from a year ago, if I look at the December, 2013 numbers.

I'm wondering what was behind that?

That was actually done in Q2 2014, when we split the software blades to a new line.

So now we have product, software blades, and update and maintenance.

The software blades that are classified as products were also classified as software blades.

Okay.

Got it.

So the $156,000 reported a year ago is now $152,000 as the difference when into place?

Exactly, yes.

Okay.

And the blades (multiple speakers) -- it just used to be products.

Perfect.

And then, Gill, on R80 -- I mean, we've been hearing about it for three or four quarters from some of your Partners and so forth.

Can you talk about -- I know you've generally said in the past that a new release like this doesn't have any immediate revenue impact.

But can you talk about what you're trying to accomplish with the release?

And as we look out, maybe, not the next couple of quarters, but over a longer period of time, what will this enable you to do?

Or where can you get revenue that you haven't gotten revenue from in the past with R80?

I think R80 can lead to many things.

One, first and foremost, we're doing it for our customers, that they can continue with our management platform that's been characterized for many years as years ahead of the competition.

And I think recently, we're taking another leap forward -- we're not resting on our laurels, but we are pushing it forward even further.

And I think that's very important.

I think it's important to make customers' life easier.

I mean, there's many capabilities, whether it's multiple administrators; whether it's a faster times to make changes; whether it's the size of the databases and the number of rules and objects we can store, which can grow 1,000 times more by utilizing new storage technologies and new database technologies.

The most important element is actually the security consolidation.

It helps customers to get better security.

It's much better capabilities to consolidate the management of multiple functionalities and multiple software blades from one rule base or one policy when everything is incorporated together.

And the effects are very clear.

So this is another element.

Now where can it help us financially?

I think winning more customers and winning the confidence of existing customers is always important.

I believe that there's a greater possibility of seeing some refreshed cycling management platforms.

We have the Smart-1 name management platform, and that can be helpful.

But I look at it as part of our overall product growth.

And I think the excitement around customers and Partners is a very positive thing.

And hopefully, it will lead us in the right direction.

Great.

Thank you.

Our next question is from the line of Phillip Winslow with Credit Suisse.

Please proceed with your question.

Thanks, guys, and congratulations on the quarter.

Just to build off Walter's point.

If you kind of apples-to-apples the historicals, it looks like you guys grew product revenue 5.9%, whereas consensus was still using the old breakdown, so that was at 4.7%.

So you had upside to billings and better product growth.

So that's a really impressive quarter.

My question is twofold, here.

One, just on blade [attach].

Obviously, with the deferred outperformance, I'm assuming you're seeing an improvement in blade [attach].

But I wonder if you could also comment on renewal rates?

And then, second question, just as far as the OpEx goes for 2015.

I wonder if you could give more granularity on where those investments are going into?

Some more color would be great.

Thanks.

I'm sorry.

I forgot the first question.

Blade [attach] and blade renewal.

Yes.

Sorry.

So stating the same numbers we've seen for the last year, renewal of the bundles was around 40%.

And renewal of the un-bundled was around 70%.

So it remains to be very strong.

This quarter, we saw a nice growth, both in the DLP compliance Anti-Bot and threat simulation, which as many of them are part of our new blade, which was very nice to see.

The renewal rates, pretty much, stayed the same.

The second one was related to the OpEx expenses for -- about next year.

So I think, when we looked into what should we do in 2015, and what should we do differently, one option that we had was to continue with our regular expansion, which I think, in the last few years produced great results and kept our margin at the industry record and allowed us to grow nicely.

But I think what we've seen is that we are not capturing the full opportunity of the market.

We have the new solutions for mobility and threat prevention that requires us to make several investments in introducing them and focus on them.

We think that we can serve more customers.

We think that existing Partners and customers can get from us more attention.

And all of that can lead, at the end, to a higher growth rate that we have.

So based on that, we decided to accelerate our investment in these groups, in addition to even more expansion in the development team.

And add many more people, which will help us seed the new markets and expand and better serve customers and partners on their existing markets that we serve.

I think, based on that, we decided to accelerate our hiring plan significantly.

And significantly means by hundreds of people around the world over the basic plan [over the organic growth].

Our aim in that is double-digit growth in the revenue.

And I think this will take us a little bit of time to achieve that.

I mean, if we hire a salesperson now, we should expect some early results towards the end of the year and most of the results in 2016.

Recruiting new customers or, let's say, starting with a new area like mobility, we will start by winning many -- or my goal, at least is winning many customers and then expanding some of these customers to be major deals that contribute a lot of revenue.

So these are a few examples about what we think we can do.

And the overall goal is to get to this year-end and beginning of next year with a higher growth rate than we were used to in the last two or three years.

Got it.

Thanks, guys.

Our next question is from the line of Brad Zelnick with Jefferies.

Please go ahead with your question.

Thank you very much.

And I'll echo Phil's compliments on a great quarter and a great year.

I've got two questions.

First, one for Gil.

And then, one for Tal.

Gil, I think most of us appreciate the strength and flexibility of your architecture and why you'd benefit as customers simplify their security environments.

But perhaps you could talk -- what evidence do you see of solution consolidation?

Specifically, do see customers bringing more capabilities onto a single platform versus integrating point products as they've done in the past?

And then, a tactical question for you, Tal, on software updates and support.

It seems to be much stronger than we've seen before.

Is that just in anticipation of the R80 release and customers getting current on support, or is there anything else driving that?

Thank you.

So I think we are seeing more proliferation and more security solutions.

But we've seen great evidence in the past of what happens when consolidation works and when it works right.

I will give you one example that's already a few years old, and that's the example of IPS.

IPS started as an IDS industry many years ago, then evolved into standalone IPS products with some good solutions that achieved nice numbers but reached relatively small number of customers.

We produced our integrated IPS a few years ago, and once these products got to the right maturity and the right quality, we're seeing now that the whole IPS industry has changed.

Standalone IPS products and standalone IPS companies are almost nonexistent anymore.

If you look at the adoption rate of IPS, the majority of gateways and the majority of customers are now using the IPS blade, and it's contributed to our growth very nicely.

You can see the software blade revenues.

It's not just IPS, but IPS is a big part of it and contributes a very nice number -- a nine-digit number -- to our revenues just by (inaudible) IPS, not the [additional details] to the gateway itself.

And this is a great example where consolidation actually works.

I think, in many technologies, you start at the beginning with some -- or not some -- many competitive vendors trying to prove themselves, reaching small numbers of customers.

Sometimes doing good jobs, sometimes not doing such a good job.

That varies.

It's not always that the new vendors are producing amazing results.

Sometimes they do, sometimes they don't.

But to reach mainstream, it is very rare that there is a new platform created.

And I think I gave you one example or two more examples of that.

And I think we are looking to do just that in several new areas.

One of them is threat emulation, that I think has a huge potential.

And I think we are starting to show the quality of our solution.

It's not just the quality -- the quality, the speed.

I mean, I gave an example of the 100% catch rate.

Our IPS solution is also the one solution that blocks all the attacks before they reach the networks.

Some competing products let the attack through and give you, half an hour later, an indication that something wrong happened and start blocking it hour later, a day later.

You can look at the competition and see what they are doing.

This is embarrassing.

It's horrible as a security person to see that we will let things penetrate into our network when we should be able to block it.

So I think this is a great potential for consolidation.

It will take some time.

And that, by the way, additional people on the field that can give customers that feel of, what does it mean and how does it work?

And focus on these kinds of solutions will help us further show the customers the value of the solution itself, and even the value of the consolidation, which is much higher.

Because remember, if you have 50 gateways on your network or 20 gateways on your network, getting our threat emulation on your network is fairly easy.

Every one of these gateways becomes a gateway that enforces the threat emulation and sends these files to be checked.

If you have to build another solution, the cost is millions of dollars.

It's almost impossible to guard -- to get everywhere.

It's not scalable, and that simply won't happen.

So we're seeing -- and by the way, we're seeing that some of these limitations with other vendors have major attacks when the data center of the company was protected.

But the penetration happened through the branch offices.

And there have been a few famous attacks with that.

To do this, we think that we need the additional investment because I think we have the technology.

We have the product.

And we need to greatly increase our awareness and investment in the specific customer scenarios in sales and marketing.

Great.

Next caller, please.

And Tal?

Sorry.

So your question was about the updated maintenance?

So remember, Q4 is typically significantly more because you have a -- the largest quarter for bookings that relate to update and maintenance.

You have professional services many times attached to it -- installation, the cycle of management, and so on.

So I would say it increases.

It's not a typical growth rate.

You can see 7%.

It's higher than the usual, but definitely, the trend that it's increasing is relating to the strength that we see in the product.

Therefore, you have attach rate which is better on the update and maintenance.

So we saw an increase throughout the year.

Q4 is obviously a bit higher than usual, as typically in Q4, in many years, as a result of also professional services and the other services.

Thank you.

Our next question is from the line of Daniel Ives with FBR.

Please go ahead with your question.

Yes.

Thanks.

Gil, how would you compare what we're seeing in the space -- just over in cyber security spending -- relative to your span of being in the industry for so many decades, in terms of hyper-growth, [secular]?

Is this once in a multi-decade type of growth that you've seen?

We don't see the hyper-growth in investment by company because companies are still tight on budget.

And while many of them say that they want to invest in better cyber security, their overall investment in this area is may be slightly higher than other areas, but not hugely higher than they do another areas.

What we are seeing is that when the right solution is presented to them, companies are willing to cut the check and spend the right amount on the right project.

Remember, at the end of the day, IP security is still a very small part of the IP budgets, overall.

And I think that's the big challenge when we're talking.

I mean, see, there's two challenges.

One challenge is with the high-end customers that are willing to do big projects and are willing to pay millions of dollars or hundreds of thousands of dollars for new capabilities or better architecture and so on.

They require a lot of attention in crafting the right solution, demonstrating it, doing the right pilots, and so on.

And they require the more headcount between these two.

There's another opportunity, which is in the mid-market.

There, the customers are less knowledgeable -- they won't spend six months to evaluate technologies, and so on.

And there, they even more need the consolidation because they get the awareness that they can now get a new gateway which will also do threat emulation.

And that's an industry norm, and they can rely on it.

They'll do it.

But if they're not -- an IT guy, one IT manager, in a company of, say, 1,000 employees that makes the decision.

He's not necessarily an expert in security.

So if he's not very well aware and very well educated, you will skip that.

And if he's well aware and educated, then our strategy is very much for him, because he can simply add the blades and get the additional capabilities.

We are spread around all these sectors.

We serve midsize customers, we serve very large customers, and we serve all the other customers sizes.

And we must make the investment to win all these opportunities.

And I think we do realize that opportunities is bigger, and we can do more to invest and to get customers to utilize better technology and get better security.

Just a quick follow-up.

Just given this sort of new frontier in investment, and given the opportunity, is there a change, in terms of how you view acquisitions?

Obviously, [rather] you're going to do organic.

But in terms of bolt on acquisitions -- I mean, obviously, valuation discipline -- but can you maybe just speak of your view going into 2015, from an M&A perspective?

I think we've been serious about looking at the right acquisitions in the past, and we are in the future.

I think we will look for the best technology that can be incorporated into our platform.

My main focus remains on making (inaudible) from a better platform, not on buying revenues for the sake of buying revenues.

That may be good for a short period of time, but actually makes life more difficult in the long term.

I think what I'm looking is things that can be incorporated into our architecture, that can give the benefit to a large number of customers, and of course, having the best technology.

And there aren't too many of those that have a large installed bases.

But there are a few of these technologies that can be incorporated and are great additions and can make our technology even more differentiation in our market segment.

Thanks.

Our next question is from the line of Michael Turits with Raymond James.

Please go ahead with your question.

Granted the footnote is always on just being difficult to predict the future.

But with the EPS guide, it looks like margins go down a couple points into 2015.

How do you feel about margins, longer-term, and whether not that's kind of a temporary phenomenon and we should be back to operating leverage after 2015?

I've been quite, actually, consistent about that for the last 19 years -- since we were public, almost.

That our focus is not on the gross margin; our focus is on growing.

And growing in a healthy way and in a profitable way and serving the customers.

I think, having said that, we have been expanding our margin, over these 19 years, even though we started with very high margins in 1996.

I think that remains the focus for next year.

I mean, with the operating margins of 58% or 55% or 53%, in all cases, we'll have tripled the margins in our industry.

We're best competitors in the industry.

Most competitors in the industry are actually hardly profitable.

I think our focus remains -- where's the right investment?

And when I look at what we should do next year, my main focus is -- are we doing the right thing, and are we doing it in a healthy and profitable way?

And I think all the investments that we make today are pointing to that direction -- making healthy investments, making investments that, in the near future, will be profitable.

[Whether we're left] in the gross margin of 50% or 58%, I think we can analyze it further.

But that's not the main priority.

The main priority is to keep the growth and keep the opportunity on our side.

And then, sort of a different subject -- I think you listed threat emulation as one of the blades it was driving growth.

I cannot recall if you had called it out in prior quarters.

But was there and inflection or an acceleration of adoption from threat emulations that was material this quarter?

There definitely was an acceleration and very high growth and threat emulations.

But it's still very small, compared to the other blades.

I think what you are seeing with the blades that are a year or two years old -- or two to three years old -- we're seeing there's a very large adoption and very high renewal rates.

And I think that's very good.

If -- in the beginning, we'd seen the big contribution to blades or blades that are bundled with the products.

Today, we see the high growth from blades as the unbundled blades, as customers choose to buy new blades on top of existing infrastructure or customers that choose to renew their blades.

And that's testimony to the growth of the blades.

When you bundle things together, you can easily shift things from one place to another.

The execution or the reality is seen only two or three years later, when you actually see whether a customers actually using it and whether they are willing to pay for it.

Right now, we have terrific answers to that question, because customers are showing us, on their second and third and fourth year, that they are using the technologies and that they are more than willing to pay for them.

And that's great.

Okay, Gil.

And maybe, Michael, just--

Oh.

Hi, Tal.

The growth in percentage was very nice in DLP, in threat emulation, in the compliance blades -- as they started to pick up very nicely -- and the Anti-Bot.

In dollars, still, application control is one of the largest.

IPS is the largest.

That's the top two.

Okay?

Thank you.

Thanks, Tal.

Thanks, Gil.

Our next question comes from the line of Aaron Schwartz -- Macquarie.

Please go ahead with your question.

Thank you very much.

I know, historically, you've spoken quite a bit about how larger installed bases and the focus is really on serving that sale base properly.

It sounds like some of your commentary, here, with your investments, is more so in capturing new customers.

I was wondering what has changed there to, maybe, modestly shift the focus to new customer acquisition?

It seems like a little bit of a change in tone from the way you have spoken, historically.

I think our focus was on both and remains on both.

On one hand, we always try to grow the installed base and add customers.

And we've been north of 1,000 new customers every quarter, consistently, in the last few years.

On the other end, the biggest dollar amounts that we get in growth is winning new projects and more projects with customers.

Remember, we have a very large installed base -- close to 100% of the Fortune 100 are customers, a huge percentage of the Fortune 500, and many other companies.

So on one hand, the ones that are not customers, we should add them to our customers list.

On the other hand, it's not just enough that someone is a customer.

We should make all these customers using our technology everywhere.

We should make them use all of our technologies.

And we can do better on this.

I mean, we've been -- there's customers that have been extremely loyal customers -- that love us, that think that we are their standard -- and yet, not using some of our blades.

And we can make them consolidate their infrastructure with us.

There has been projects and fields -- and I talked about mobility, as an example -- that's very much related to what we do.

But in most customers, it's different people, different projects, that we haven't been addressing at all.

That is a great opportunity to consolidate that and give a better solution.

I mean, we are looking at both whatever consolidation makes sense, but also in being the best solution.

And when you look at our Capsule, it's a much better product to use than any other product in the marketplace.

It's simpler.

It's cleaner.

It's faster.

It provides much more security.

It provides more security capabilities.

So there's no reason for us not to push forward for us and try to win big projects, as well.

Great.

And second question, if I could.

In looking at the guidance for Q1 and the year, it does seem like there's a little bit of a revenue uptick in the second half.

How much of that is from some of the investments you've talked about, or would any productivity from these investments be the upside to your plan?

Thanks.

The uptick in the second half is relating -- that's the beginning of the fruit we hope to see already from the recruitment that we have.

Most of the recruitments are Q1 and Q2.

So you see the most effect on expenses in the first half and in Q3.

The revenues will start to increase toward the end of the year.

That's the plan, at least.

Next caller.

The next caller is from the line of Gregg Moskowitz with Cowen and Company.

Please go ahead with your question.

Thank you very much.

You executed well across the board, but the performance in Europe was extremely strong.

In fact, it looks like you saw around 25% sequential revenue growth in Europe.

And that is more than we've seen in a pretty long time and, really, tells a different story than the mixed backdrop that many software and tech companies are seeing.

Gil, why are you doing so well in Europe?

And do you think healthy, double-digits strength in Europe is sustainable 2015?

I guess, I'll need to think about it.

I have no good explanation for that, except that we actually saw very good results in Europe in this past quarter.

It varied between quarter, but the last quarter was really good.

Okay.

And then a follow-up to Michael's question.

As he pointed out, we're looking at a couple of points or so of margin hit.

Specifically -- just as a function of the investments.

So specifically, we're coming to around 55% or slightly less than that at the midpoint of the range.

At the same time, the shekel has certainly been moving in your favor.

And based on current spot rates, just wondering, approximately, what sort of benefit you expect to see to OpEx or operating margins -- from FX, specifically?

I think the strength of the shekel, definitely, can help us.

It helps us, mainly, in growing the R&D spending.

But we took into account in the guidance.

I will say the following -- remember, the dollar picked up already in Q4.

So in Q4, you already saw the effect of -- most of the effect of the dollar.

And this quarter, you saw it.

So it gave us about $0.02 in Q4.

It can give us slightly more, but we took into account in the guidance.

And the reduction that you see, if you already build the model, in the operating margin is maybe because we increased significantly our headcount.

So the guidance is netting the two [FX].

And remember, recruiting people in sales around the world -- the shekel doesn't help us.

And also remember that when we attempt to hire many developers and many sales and marketing people, sales marketing people around the world are much more expensive than [R&D] people in Israel.

Right.

Okay.

And if I can ask one other question.

So, Gil, you haven't talked that much about the small business market, recently.

It sounds like it did quite well this quarter.

I'm wondering if there was anything in particular that might've driven stronger growth for Check Point with small businesses in the Q4?

I think we've launched -- a year and a half ago -- a new product line.

And since it was launched like five or six quarters, it's producing great results and great growth.

And we are trying to capitalize more on this market and build a more focused sales and marketing group, but we haven't done this yet.

So I think that's still ahead of us.

But we've been doing a few trials.

And so far, we haven't found the right person or the sweet spot.

But we're still seeing growth, which is great, without that investment.

Growing the small business sales team, or dedicated team for small business, is still on our goal list.

And we have a new leader for that.

And we intend to make that a reality, too.

So hopefully, if we [like what we try], it's not the end of the world for small business.

It's just the beginning.

Terrific.

Thank you very much.

Our next question comes from the line of Karl Keirstead of Deutsche Bank.

Please go ahead with your question.

Thanks.

Tal, a question operating cash flow.

I think you mentioned that, if we adjust for all the tax refunds and payments, that operating cash flow was up 5% in 2014.

That's a little bit less than your adjusted earnings growth.

Do you think that relationship between operating cash flow growth and adjusted EPS growth will hold in 2015?

Or are there any factors that might change that ratio to flag for us?

Thank you.

Yes.

So actually, we don't want to make the explanation too complicated.

But it [increased more].

We had the hedge expenses, relating to the fact that we hedge our balance sheets, if you recall.

So when the shekel, for example, is getting stronger, it's good for the P&L.

But from the cash flow perspective, we have to pay for the balance sheet effects.

Right?

Because we have more liabilities in the balance sheet.

So that effect, if I would have excluded that, the cash flow would have increased more than the 5%.

I just didn't want to give you a very long and complicated explanation, which I just did.

But I'll say -- there should be a very strong correlation between the growth, the net income growth, and the cash flow growth.

Okay.

That's helpful.

Thanks Tal.

I am reminding you -- the last quarter, we talked about the fact that we're going to invest in the building and the headquarter in Israel.

And I think we gave a budget.

So just bear that in mind.

[We got in next year cash].

And they just put the crane today.

Yes.

My office will be [spun out] real soon.

Our next question is from the line of Sterling Auty with JPMorgan.

Please go with your questions.

Hi.

This is actually Ken Talanian, in for sterling.

I just wanted to touch back on the support and maintenance line.

It looks like you saw some strength there.

I was wondering if there was any change in pricing to either maintenance or support?

And related to that, I was also wondering if the mix was different from prior quarters, in terms of the split between maintenance and support for services?

No.

As I said, Q4 sometimes, can fluctuate slightly higher than the average, as a result of the end of the year project installation, professional services, and so on.

[Atop it all, I think the strength will be]-- (multiple speakers).

Okay.

The other thing is, I was looking at the gross margin came down a little bit for that line item.

Just wondering why that might be?

Nothing that I can think about.

Nothing specific.

Everything was pretty much in line.

Obviously, growth margin can move a bit up or a bit down.

Okay.

Thanks very much.

Thank you.

Your next question comes from the line of Robert Breza with Sterne, Agee.

Please go with your questions.

Hi.

Thanks for fitting me in.

Gil, you talked about the accelerated investments.

I was wondering if you could speak to that, maybe, a little bit more granularly, relative to the geographical breakdown?

Do you see yourself investing more on the European site?

Obviously, great growth this quarter.

If you could help us understand the investments by geography, that would be great.

All of the geographies -- our three main geographies between Europe, Americas, and Asia -- we've been growing quite consistently across all of them.

We gave our leaders in each geography the task to tell us what headcount they need and what they can contribute to our growth in the future.

And we basically gave them, pretty much, what they wanted.

And I think I will look for them to produce great results in the future.

Okay.

Thank you very much.

So I think that -- so we'll be adding a nice number of people in Europe, in America, and in Asia.

Okay.

And each (inaudible) with different [needs], different profile.

The talks that we have and the challenges and, mainly, the opportunities that we have are slightly different in each one, in each area.

Europe and Asia tend to be more different countries -- how to [conquer] and how to improve in these countries.

The US tends to focus more on the customers and [other market] and specific market segments being one big country.

And the [flatter] markets.

And I think we'll [conquer] all of them.

Thank you.

Thank you.

We're nearing the end of our question answer session.

There's time for one final question.

That will come from the line of Keith Weiss of Morgan Stanley.

Please start with your question.

Thank you, guys, for fitting me in -- just under the wire there.

Going back to the investments, in my model, it looks like total expenses are going to be up high teens.

And given the strength that we're seeing in the security market, it definitely makes sense to invest into it.

Two questions there.

It sounds like investments are going to be focused more on sales and marketing.

I was wondering if, one -- if you could give us a sense of what type of expanded sales capacity you expect to see through this increased investment?

And then, two -- given Gil's comment about you're not seeing hyper-growth across the board, if you give us a little bit of specificity into, particularly, what areas do you think are ripe for -- or where you guys could see increased opportunity?

Or where those particular opportunities are in a marketplace, where you're going to be focusing on?

The key focus areas will be threat emulation and mobility.

But I think that we also have a great opportunity in better supporting and integrating and working with existing customers, existing projects, and mainly with better working with their our Partners.

So these are the three areas -- mobility, threat emulation, and the existing Partners and customers.

Got it.

That's all.

And then, in terms of sales capacity expansion?

In terms of?

How much do you expect your sales capacity to expand?

We didn't provide those numbers.

The idea is, I think, simple.

We want to increase significantly the sales and marketing headcount, in order to produce additional sales from all these additional opportunities, which expected to happen toward the end of the year and more towards the beginning of next year -- the 2016.

Got it.

But you don't want to quantify that increase in sales and marketing capacity?

We'll be adding hundreds of people of sales and marketing as well as, by the way, a couple of hundred people in development.

Got it.

Excellent.

Thank you, guys.

Thank you.

Thank you, guys, very much.

And that concludes the call.

If you would like a callback, just let us know via e-mail or what have you.

And we'll look forward to talking to you guys throughout the quarter.

Have a great day, and we'll talk to you soon.

Bye-bye.

And this concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.