Check Point Software Technologies Ltd (CHKP) 2015 Q1 法說會逐字稿

Greetings and welcome to the Check Point Software Technologies first-quarter 2015 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 Technologies.

Thank you, Mr. Meintzer, you may now begin.

Thank you, Manny.

Good morning, everyone.

I'd like to thank you all for joining us today to discuss Check Point's 2015 first-quarter financial results.

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 April 27.

If you'd like to reach us after the call please contact Investor Relations by e-mailing me at kip@checkpoint.com or by phone at plus-1-650-628-2040.

Before we begin with Management's presentation, I'd like to highlight the following.

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

These certain forward-looking statements within the meaning of Section 27-A of the securities act of 1933 and Section 21-E of the Securities and Exchange Act of 1934 include, but are not limited to, statements related to Check Point's expectations regarding business, financial performance, customers and products including expectations for product introductions, enhancements, and the integration of recently acquired technologies.

Our expectations regarding the integration of recently acquired companies and technologies; and the future expenses related to those recent acquisitions; our expectations regarding the introduction of new products, programs, and the success of those products and programs; our expectations regarding expanded investments and hiring across the organization, including the expectation of continued headcount growth in the development, sales, and marketing teams in 2015; our expectations regarding capital expenditures and future periods as well as the shareholder repurchase program; and our expectations regarding our business and financial outlook including our guidance for Q2 2015 and the full year.

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 Release issued on April 20, 2015, which is available on our website.

And other factors and risks including those discussed in Check Point's Annual Report on form 20 F 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 is posted on our website, we present GAAP and non-GAAP results along with a reconciliation of such results, as well as the reasons for our presentation of non-GAAP information.

Now, I'd like to turn the call over to Check Point's Chief Financial Officer, Tal Payne, for a review of the financial results.

Thank you, Kip.

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

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

Q1 provided a good start for the year with revenue growth of 9% year-over-year, reaching $373 million, towards the high-end of our guidance.

While non-GAAP EPS exceeded our guidance with an increase of 14% to $0.95.

Before I proceed further into the numbers let me remind you that our 2015 first-quarter GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets, and acquisitions-related expenses and the related tax effects.

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

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

In the first quarter our revenues reached $373 million, an increase of 9% compared to the same quarter a year ago.

Total revenues from product and software blades grew by 11% year-over-year.

We had success in many areas including the small, mid, and data center appliances.

In addition, the management appliances that we launched mid-last year show the very strong growth, a testimony of the strength of our management architecture.

The growth in total revenues was also driven by the continued success of our software blade, which grew by 20% year-over-year.

This growth led mainly by our next-generation threat prevention packages.

Our software update and maintenance revenues reached $184 million, representing 7% growth year-over-year.

Deferred revenues were strong at $772 million, an increase of $112 million, or 17% over March 31, 2014.

The deferred revenues decreased from 2014 year-end is expected seasonally.

The revenue growth was across all our regions during the quarter.

In particular, Asia did very well with double-digit growth.

Revenue distribution by geography for the quarter was as follows: the Americas contributed 48% of revenues; Europe contributed 36%; and Asia Pacific, Japan, Middle East, and Africa region contributed the remaining 16%.

From deal size perspective we continued to see strength in our large deals.

The number of customers with transactions over $1 million increased by 19% to 43 customers this quarter compared to 36 in the same period last year.

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

Our non-GAAP operating income for the first quarter was strong at 58%, or $216 million, an increase of 9% compared to the first quarter of 2014.

GAAP net income for the quarter was $161 million or $0.86 per diluted share, an increase of 5% year-over-year.

Non-GAAP net income for the quarter was $179 million, or $0.95 per diluted share, up from $164 million, or $0.84 per diluted share in the same period a year ago.

Non-GAAP earnings per share grew by 14% and exceeded our guidance.

The growth is a result of the revenue strength and dollar tailwind against other currencies around the world.

During the quarter we began enhanced recruiting mainly in our sales marketing and R&D teams, and we plan to continue and grow our headcount in those departments.

In addition, recently we acquired two companies.

Hyperwise during the quarter and Lacoon immediately after the end of the quarter.

The effect of the increased costs from enhanced recruiting and the acquisition is expected to ramp up in the second and the third quarter of 2015, as discussed previously.

In 2015 in the acquisitions are expected to have a $0.10 effect on EPS on a GAAP basis and $0.04 effect on a non-GAAP basis, resulting from the acquisition related expenses.

Our cash flow for operations continued to be very strong and increased this quarter to $285 million.

I remind you that the first quarter cash flow is the strongest of the year as a result of the collection of the booking of the fourth-quarter last year.

Part of the acquisition payments which is contingent, is presented in operating cash flow according to accounting rules.

The remainder of the payment is presented as part of the investment activity.

Excluding acquisition related payment this quarter and the tax settlement payment in Q1 2014, our cash flow from operations increased 8% year-over-year.

We continue implementing our expenditure buyback program during the quarter and repurchased approximately 3 million shares for a total cost of $242 million.

So our cash balances reached this quarter [$3.734 billion], (sic - see press release - $3,734 million) at the end of the quarter.

Now, let me turn the call over to Gil for his thoughts on the first quarter.

Gil?

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

We started 2015 with healthy results and with many industry (technical difficulty) capitalizing on the expanding security market opportunity.

We executed on our accelerated recruiting plan in our development Sales and Marketing Department and added more than 200 people in the past quarter.

On the technology front, we are putting strong focus on two key areas, mobility and threat prevention.

In the first quarter we demonstrated this focus with the release of our threat extraction technologies.

APT, or Advanced Persistent Threat, are the source for many zero day attacks.

These are generally documents that are being sent or downloaded by users.

They look innocent but high-dangerous malware.

Our threat extraction technology reconstruct these files, and in the process, eliminates the potential threats and delivers clean files to the user.

So far we've seen 100% threat removal rate at a fraction of the time that it takes other technologies to emulate files and produce much lower catch rate.

We've also completed two important technology acquisitions in these [spaces].

In February, we've acquired Hyperwise, the [self-mode] start of the developing unique technology of CPU-level threat detection.

CPU-level threat detection stops zero-day malware at the moment the malware attempts to use an exploit and before the malware is able to install or create any damage.

Due to the special feature of the hardware CPU, and therefore is external to the operating system, and all our software layers, making it more effective and harder to circumvent.

While most threat emulation technologies wait for the malware to install itself and cause damage, the CPU-level threat prevention detects the attack earlier, making it more effective for a large group of exploits.

With Hyperwise becoming part of our threat emulation software blade and cloud service, we believe that it will take our threat prevention technology to new levels stopping threats with that no other solution can detect.

Another key focus is mobility.

In April, we completed the acquisition of Lacoon mobile security, a leading threat prevention solution for iOS and Android environment.

Lacoon has some major customers such as Samsung, Intel, and Dell, which utilizes its mobile client to keep smartphones fast and safe.

Lacoon uses a unique set of technologies with static and dynamic threat emulation in the cloud and device agents that can stop suspicious activity on each mobile phone.

Some of today's most advanced malware can make mobile phones a true tapping device not only leaking business documents, but recording private conversation on the phone and sending them to the malware operator.

Once you see how easy it is to make your smartphone a tapping device, you'll be shocked you haven't yet installed this software in your environment.

The Lacoon technology will compliment our Capsule mobile security solution that we launched late in 2014 and delivers a single consolidated mobile security platform.

We've also demonstrated our new flagship security platform, R80.

It is designed to be the security consolidator.

We've combined the management of different technologies into unified security policies.

We've made very large-scale management extremely fast, sometimes up to 100 times faster than it was before.

We're [aligning] multiple security administrators to make changes and updates in parallel, and of course, managing the widest set of Security Technologies, or software blade, in a single platform.

You might ask yourself why is this so important?

There are many technologies to fight today's cyber attack.

One of the reasons our market penetration is very low and the overall market level of cyber security isn't high enough is the fact that it is not practical for an enterprise to build and manage a security environment with so many separate technologies and vendors that don't cooperate.

With R80 we will be taking on that challenge by enabling mass deployment of the most advanced cyber security technologies with a single unified management designed to scale to any size organization.

In the first quarter we had some nice wins.

We won some better deals with our platform in the US and Europe and Asia led the pace with strong double-digit growth.

These wins include some of the world's leading financial institutions, insurance companies, telecommunications providers, shipping companies, retail chains, and government agencies.

Overall, I'm very pleased with our progress this quarter and look forward for our investment in innovation to bear fruit in the future.

This brings me to the financial outlook.

As always, it is hard to predict the future as there are many factors that can lead to outperformance or underperformance that must be taken into consideration.

We've completed two acquisitions so far this year.

We don't expect these acquisitions to change our guidance for the year on a non-GAAP basis.

However, on a GAAP, EPS is expected to be approximately $0.45 less than the non-GAAP EPS, taking into account these acquisitions and other non-GAAP items.

For the second quarter we expect revenues in the range of $380 million to $400 million and non-GAAP EPS in the range of $0.90 to $0.99.

GAAP EPS for the second quarter is expected to be approximately $0.12 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.

Thank you.

(Operator Instructions)

Brad Zelnick, Jefferies.

Hi, this is [Adrian Lubitsch] on for Brad.

It's nice to see that not only are billings strong, but current billings are even stronger, growing 10.5% by our calculation.

Can you talk about trends in customer desire to do longer-term deals?

And how we should think about modeling that?

I think if you ask us -- you're right deferred revenues increased nicely, and when you calculate your implied bookings, it shows that also the booking was a nice growth.

And long-term contract, it can vary between quarter to quarter.

Obviously, if the customers would like to sign long-term, then we would like it, and they're welcome, but it's not something we're pushing for.

And as you can see, it can fluctuate easily.

But if you look at the short-term deferred revenues, also the short-term increased nicely.

So I can't give you a model just because it's not something that you can model.

Okay.

Thank you.

Walter Pritchard, Citi.

Hi, thanks.

Tal, I'm wondering if you could just give us a sense of the impact of the weaker shekel on your operating expenses for the quarter.

I'd imagine that had a meaningful impact.

And then I had a follow-up on a financial question as well.

Sure.

So remember that the start of the guidance that we provided we knew that the dollar is already quite high, so it's incorporated in our guidance.

And the effect versus last year was about probably around $0.04 or so.

Year-over-year, it's about $0.04.

Okay.

Great.

And then just a broader question on business, I think we've talked to you a little bit about this during the quarter.

You price in dollars; the dollar strengthened.

You didn't sound like, when you gave guidance last quarter, that you were expecting that the strengthening dollar would have any impact on customer purchasing behavior.

But just curious how that ended up in the quarter, if you saw any deferrals of deals or so forth as your product became more expensive in other areas that translated?

I think it's very hard to tell, as you know, because when other companies sell in local currencies, it's very easy to calculate on an Excel file what was the effect, right?

Just like we can do on the expenses.

On the revenues or on the booking, it's very hard to know what happened.

I can tell you that in Europe we saw some countries that did great, and East Europe was less great because of the effect of currencies there was significantly stronger --

Yes, but remember, Russia had a major crisis last quarter, and we do see that effect.

The effect is more that the Russian economy is in trouble rather than the US dollar strength.

Yes.

So I think it's much harder --

Okay.

Great.

Thank you.

Gregg Moskowitz, Cowen and Company.

Hi, thank you very much.

Just a couple of questions.

I guess, first off, it sounds as though you're not expecting, Tal, any revenue this year from Hyperwise and Lacoon.

Just wondering from a high level, what sort of contribution should we be looking for from those two areas in 2016?

I don't know if we can calculate that specifically or separate them.

Because we do want to incorporate them into our existing offerings, so in the Hyperwise it will be fully incorporated into our threat prevention -- threat prevention, and threat emulation services and software blade.

And in the case of Lacoon, it will be part of our capsule and mobile suite.

And I think the capsule is in its early days and Lacoon is the early days.

I think we will look at them as single line of products, and we'll measure them together.

Okay.

Thanks, Gil.

And then I know you hired over 200 people in total for the quarter.

Just wondering, could you comment on the quantity and quality of sales hiring specifically, or just how that's been so far relative to your expectations?

Thanks.

I think, first, we hired many more than 200 people.

We grew the headcount by 200 people.

And I think, overall, we found we feel that we found good people.

And the same quality that we've been hiring before.

Okay.

Thank you.

Karl Keirstead, Deutsche Bank.

Thank you.

Gil, my question is to you about the announcement this morning, about the threat intelligence partnership with FireEye.

I'm wondering if you could describe that a little bit for us, what's the motivation to tie up with ostensibly one of your competitors?

And practically, how does it work?

Is this really a product integration announcement?

Or might the partnership go a little bit deeper than that?

Thank you.

I think we've talked last year about the need for more intelligence to fight threat.

We've opened the IntelliStore which provided the first platform for integration of security intelligence to the benefit of the customer.

And that's also what's behind our efforts with FireEye.

I think in both ways, we have a lot of threat intelligence with our sensors and our system find every day.

FireEye, I'm sure, finds a lot of information in that space, and I think we want to allow the customers that have both systems to utilize that system and to exchange information between both systems.

So that's the interoperability that will happen.

I think it's a very good thing for customers.

And that has been our focus, and I think open it to the customer focus is, I think, some of the key values that they're trying to work in Check Point for the past 20 years, and that's what we continue with.

Okay.

That's helpful.

And just a follow-up on that, Gil, if the partnership is really beneficial to customers that have both FireEye and Check Point appliances, do you have any broad sense for what the overlap is in your customer base?

What portion of Check Point customers also have FireEye appliances and could take advantage of this data sharing?

I don't have any numbers.

I think it's fairly small.

Our install base is very large.

I think FireEye install base is a little smaller, so I think the overall is quite small.

Okay.

Thank you very much.

Subu Subrahmanyan, The Juda Group.

Thank you.

I had two questions.

First on the full year guidance that you provided in the past, sounds like you're maintaining it and the expectation of 10% growth exiting the year.

Do some of these acquisitions help with that as you exit the year?

And can you talk about how the overall market has been for software blades?

What particular areas have been strong?

I think we're maintaining the same guidance in both cases of the acquisition.

The revenue from the acquired companies is either nonexistent or very small.

So it shouldn't matter much.

And we hope that we'll be able to contain the expenses in the range we've provided earlier.

I think the overall environment was a good, stable in the first quarter.

And what was the last part of the question?

The 10% growth rate exiting the year going into next year, how do you think about that?

We give a range.

We don't give a specific rate.

So if you look at the range we gave for our guidance, you can decide.

I can recall the range.

The range was $1.6 billion to $1.650 billion.

So in the higher end it's faster, and in the lower end it's slower.

Thank you.

Shebly Seyrafi, FBN Securities.

Can you talk about how your new threat extraction technology enhances your threat detection capabilities?

You already have the threat emulation blade.

How would the enhanced capabilities compete against FireEye and others in the APT market?

I think the threat extraction technology, surprisingly, is a much simpler and much more effective technology than many of the threat emulation technology, especially when it appeals to APT as the current hidden inside any type of document.

What the threat emulation technology, including ours, is trying to do is to elect the suspicious file running in the sandbox environment and trying to watch its behavior and predict, whether it's good or bad behavior.

And that doesn't have 100% success rate so far.

However, it's quite high.

We've had benchmark that shows that we have the highest industry level, but it still doesn't provide 100% detection rate.

In contrast, the threat extraction technology doesn't try even to see if the file is malware or not.

It just takes the file, tears it apart, and rebuilt it.

And in the process of rebuilding it, the malware is usually either using certain objects that are eliminated for the file, or the malware must use very, very specific structure of the file.

And once you build it, rebuild the file in a slightly different format, small things that create the malware go away.

So our tests so far on the threat extraction technology, show 100% elimination rate of the malware, which is much, much higher than any other technology.

It runs much faster.

When you run threat emulation, you need to take the file, start an operating system around it, run the emulation for a few minutes to see the file behavior over several minutes, sometimes even more.

Threat extraction, it's like printing a document.

You take the file, you rebuild it, and you send it over, so it runs in fractions of seconds.

And at the end it delivers a clean document to the end user.

So I think the threat extraction is a very fresh and innovative approach to giving the end user the clean file without the potential threat.

And that's why I think it's going to be very important technology to our customers.

And it's, right now, unique from Check Point.

Nobody else has something similar.

Okay.

And also, what were the key drivers of your greater-than-$1-million deals last quarter?

That were up 19%?

I think it's safe -- I always say that those number of deals can fluctuate easily.

We've seen a nice increase in Asia.

We've seen some also nice increase in Europe.

It's coming across from different geographies.

It was one of few verticals, so there's nothing that I can pinpoint.

None of them was huge transactions.

So it's quite nice flow of some large customers that purchased total more than [$1 million] this quarter.

I think I mentioned in my script it was all over.

It was from financial, insurance, telecommunications, shipping, retail, government.

These are some, not even all the industries, but the large deals came from.

Thank you.

Shaul Eyal, Oppenheimer.

Thank you.

Hi guys, good quarter.

Two quick questions on my end.

Specifically on Asia with good performance, any views what's going on behind it?

Or just prior fruition, prior investment seeing some fruition?

I think in the last year we've invested a lot in building our structure in Asia.

And I think it's bearing fruit this quarter, so I'm very pleased with it.

I don't think it's attributed to any specific macro economics or industry things.

I think it's more all the internal things that we did over a long period of time.

Got it.

From a blades perspective, for prior quarters performance, still IPS, app control, set emulation?

Any change in that tracking?

It's mainly, you're right, it's mainly the next generation threat prevention package, which includes all of the above.

Right?

The threat emulation, the IPS -- no it's not the [anti-bot] actually -- the threat emulation.

It's the threat prevention, and anti-virus, anti-spam, URL filtering, the IPS, the app control, and so on.

So it's the majority of the threat prevention blades.

Got it.

Okay.

Thank you very much.

Daniel Ives, FBR.

Yes, thanks.

Gil, what's your view as more enterprises move to the cloud in terms of security and where Check Point fits in there?

Do you see a surge of spending as we're seeing now more enterprise move to the cloud?

And maybe you could speak to how your positioned from a product perspective versus competitors?

Thanks.

I think when you look at the cloud, you speak about private cloud.

I think it's a -- company needs to use some type of the same security measures that they used before.

And sometimes slightly extended ones that have the virtualization affecting them.

And I think we're a pretty good invest, even though we're not too much for the customer interest in it.

There's not too much -- the purchasing level is not very high of these virtualization technologies.

When you're talking about client for SaaS applications, then the challenge of the security challenges become bigger because you track the security on the vendor that you're buying it from.

It doesn't change much the buying behavior of the customer because that environment is not managed and not controlled by the customer.

We have few innovative ideas of how to make it slightly more secure when customers are using the cloud.

And we're even using some internally here, but that's, again, that's a relatively niche part of the market.

And just on M&A, as you guys have gone down that path now with a few small acquisitions, has anything surprised you on the M&A market?

In terms of good or bad or anecdotal?

We haven't seen too much M&A in our direct market space around us.

Nothing major that I saw.

Okay.

Thanks for kicking RSA off with a good note.

(laughter) Thank you very much.

Phillip Winslow, Credit Suisse.

Hi, thanks, guys.

Most of my questions have been asked, but just wanted to focus on endpoint security.

Gil, there's been a lot of talk about next-generation endpoint and how its best performed, and a lot of people have different flavors on how they think [next gen] endpoint should be done.

Obviously, you guys have made some acquisitions here.

Wondering if you could just compare and contrast what you do versus what some other folks out there do, and why you think this is the most successful or the appropriate way to do so?

Thanks.

I think in terms of, first, most of our focus is not on the endpoint, but it's on the Gateway and on the network.

And we're trying to emulate sometimes the endpoint environment on our threat prevention appliances or in our cloud.

And that's what we do in our threat emulation service.

On the mobility space, I think that's a big part of, if you call it the endpoint, space does reside.

It does require a completely different approach because our mobile phones behave very differently from PCs.

And they are -- they have very different capabilities in what they can or cannot to do, and I think what we're doing there with Lacoon is a very refreshing view and a very effective view.

There aren't many companies doing that.

There's maybe one or two other companies that are doing similar things in that space.

I believe that we chose the best technology and the best company for that.

And let me tell you, when you see how easy it is to -- even though we think that our mobile devices are secure, and it's very hard to infiltrate some of the operating systems, with worms and viruses, it's shocking to see how easy it is to get inside our phones.

And it's even more shocking to see that in two minutes we can show you a demo that shows how somebody makes your, no matter which brand phone, becomes a tapping device take a picture of the environment around you, record your conversation, and everything goes to the cloud without you knowing so.

Somebody remotely there.

So I think that eventually, when this technology becomes effective enough and when companies realize that they'll see the big potential and the big need that is needed in protecting our mobile devices.

Great.

Thanks, guys.

Matt Niknam, Goldman Sachs.

Hey guys, thank you for taking the question.

Just two if I could.

One on expenses.

Maybe if you can give us a little more color on the timing of new hires during the quarter?

How we should think about some of that expense ramp you've previously discussed to hit margins over the course of the year.

And then just secondly on M&A, post the acquisitions for Lacoon and Hyperwise, maybe if you could give us your updated thoughts on any incremental M&A activity from here?

Specifically, just the latest you're seeing in terms of M&A opportunities with the run-up in private company valuations?

Thanks.

Sure.

So I'll take the recruiting and maybe Gil can relate to the future M&A activity.

But the expenses, the best assumption is typical middle of the quarter, right?

So you have sometimes slightly before, slightly after, but if you want to do it in your calculation, it's probably like half a quarter effect.

So next quarter you're going to get the full effect of the recruiting of these over 200 people.

Now, when you take into account the next quarter we're also going to recruit, so also, probably, it's going to be on average in the middle of the quarter, which means that in Q3 you're going to get the full effect of the Q2 and so on.

And that's why I say to make it clear that the effect of the recruiting in Q1 will be fully felt in Q2, plus in Q2 you're going to have half a quarter of the recruiting of Q2.

Meaning the full effect of those two quarters you will have in Q3, and that's why in my guidance, also in the beginning of the -- I said bear in mind that the margin will drop throughout the year, and then hopefully increase in Q4.

And in terms of the M&A environment, I think we keep looking for more technologies and more opportunities.

I think that the biggest efforts today invest two different resources in the Company, but our big focus will be to integrate what we've acquired, and to generate meaningful traction in the mobility space, and to make the threat prevention space, which is already quite significant in our business, even bigger and even more successful.

So that will be our two main focus areas.

On the same time, our [busy] people keep looking around, keep running around, and if we find any good technologies like the two that we just acquired, we won't be shy of doing it all gain.

Okay.

Thank you very much.

Very helpful.

Aaron Schwartz, Macquarie.

Thank you very much.

I just had a follow-up question on endpoint and mobility.

I understand this has been a small part of your business for some time, but you also have talked quite positively about the product footprint here.

With the acquisition, what do you have to do from a reinvestment side to start to move the needle a little bit on revenue?

Are there going to be different sales structures or a following reinvestment with Lacoon with additional sales people?

Or can you just walk through the strategy to get endpoint mobility to be a larger part of the business?

We are creating vertical sales forces for mobility that will be an overlay sales force.

We want to utilize our existing sales force.

We want to utilize the leverage that we have in the account contacts.

On the same time, we want to create focus around that.

All the geographies are going to have dedicated groups of people for mobility.

They will work with the local field, both to ensure that there's enough opportunities and to support these opportunities and give them all the professional help that's needed.

We've already started putting that in place, but there's still a few more positions in these groups that we still need to fill in and that we are looking to fill in the future.

Great.

And just a quick clarification question, could you just reiterate or clarify that the acquisitions will have no impact on the full-year non-GAAP EPS?

Thank you.

Sure.

So you see, when I described it, I said that the effect on the non-GAAP is around $0.04 for the rest of the year.

But what Gill said, that we believe we can observe it inside the guidance that we provided in the beginning of the year, and, therefore, we don't change our non-GAAP guidance.

On the GAAP basis, we said that we will be $0.35 less, and now we updated that we're going to be $0.45 less.

Great.

Thank you very much.

(multiple speakers) -- our guidance for the full year, basically.

Michael Turits, Raymond James.

Obviously, strong quarter on margin upside there, with a jump on the [EPS beat] from benefit from revenue.

But OpEx also came in below what I would have expected.

So was, in fact, some of that from push on spending?

Was there less spending in this quarter?

And I just wanted to be clear, Tal, was the weaker shekel any more of a benefit than you would have expected when you gave guidance?

Yes.

It was about $0.02 to $0.03 higher.

$0.02 to $0.03 benefit from what would have expected in the shekel when you gave guidance?

Okay.

And also was it --

Sorry.

That's just relating to the comment why we don't update the guidance because we know that in Q1 we benefited $0.02 or so, or $0.02 or $0.03 from the dollar effect on the one hand.

But we know that going forward, we have the increase in the expense as a result of the acquisition and the recruiting that we have accelerated recruiting rate which will be fully felt in Q2 and in Q3.

Okay.

And was there any push out of the hiring or was it on target?

No.

It was on target.

Okay.

Great.

Perfect.

Thanks.

Sterling Auty, JPMorgan.

Yes, thanks.

On the hiring on sales and marketing, can you give us a sense, how many of those people are becoming channel managers versus systems engineers?

In other words, what positions are you hiring these people into, and maybe a sense of how they're being deployed geographically?

I don't have the specific statistics, but it's all the field professions.

It's sales engineer, account manager, channel management, all the major field areas of the field are being recruited.

And in all geographies.

In all geographies, and in similar proportions to what we have right now.

And you already have, probably, the largest channel when it comes to the security vendors.

So I'm curious what the additional productivity -- how they drive the productivity.

Is it getting more dollars per reseller through the channel?

Or are you actually looking to expand even to more resellers?

I think we're going to do both.

I think that, actually, in the channel space specifically, I think we felt this year that we needed to really give more resources to support the channel.

I think in last years, we've shifted resources towards account management that always work with the channel, but doesn't focus specifically on the need of the channel.

So now we've actually created, especially in the US, more specific units that work to support the channel and work with the channel and slightly change the way we work with channels.

We've all also created a new channel program, called the Stars program, that will launch at the beginning of the year.

The overall productivity of sales people, I think we are going to -- we expect it to actually go down, so we can target more customers and get to customers that are not always easy to penetrate and so on.

So we are not modeling an increased productivity for our sales force (inaudible).

Okay.

Thank you.

Brent Thill, UBS.

Thanks.

Tal, just from a unit shipment perspective, could you give us a sense of what you're seeing?

And for Gil, just on the endpoint, when do you expect the two acquisitions to come together on an actual shipping product?

I knew you were pretty clear that you don't expect revenue this year, but just when do you expect actual [GA] for those two smaller acquisitions?

I think it will take a couple of quarters until we integrate them.

Keep in mind, one is in the mobile space, that's the Lacoon.

The other one is in the network side, not in the endpoint side.

Hyperwise technology is in our threat emulation service and threat emulation blades.

Okay, Tal.

Just on the unit shipment side, did you see any particular areas of strength?

We don't report on the units, but I can tell you in general we saw a nice increase in the units.

We saw small going up, mid going up, data center going up, but as you can see, it shifts between quarters.

Sometimes the large is doing better.

Sometimes the data center.

This quarter, it was almost across the board of the appliances.

Great.

Thank you.

Keith Weiss, Morgan Stanley.

Hey, thank you, guys, and nice quarter.

It may be somewhat related to Brent's question.

Can you give us a sense or give us an update on the subscription content and the given deals that you guys are doing?

Is that starting to level out?

And at some point, can you remind us when we'll see product revenue start to normalize in line with total revenues?

Has that ever happened?

Or is it always going to be under-pacing the total revenue growth?

I'm not sure I understood the first part of the question.

Can you repeat it?

When you think about subscription attached to appliances, how many subscriptions are coming on an average appliance or what's the subscription content of the appliance, can you give us an update on how that's been tracking for you guys?

How many subscriptions on average attached to your given appliance, and how that's been changing?

We actually don't look at it that way, but I can tell you in general that we have default packages that's called next-generation firewall or next-generation threat prevention, and I told you that actually the growth is coming from the increase of the packages of the next-generation threat prevention.

And in this package, if I recall, you have [annuity] blades probably over five, maybe even six.

So that will be the average for the customer that's buying the new appliance, right?

And that includes that package and [choose] this package.

When you asked about the growth rate, naturally, as the numbers are increasing, and right now it's already 20% of our total revenues -- not only the growth, but also the proportion out of our revenues -- software blades reach 20%.

So as this number becoming higher, so is my expectation that there will be over time deceleration in the number.

And you see it when we started, we had 50%, 40%.

Now we're around 20%, so the numbers are getting bigger.

And I expect to see, over time, deceleration in the growth of the software blade.

Got it.

Thank you very much.

Gray Powell, Wells Fargo.

Great, thanks a lot.

Maybe just to follow up on that topic.

Broadly speaking if penetration industry-wide of next-generation firewall platforms is in the 25% range, where do you think that goes longer-term?

And then, how do you view the growth potential of your more mature subscriptions like IPS?

I think, naturally, when you talk about blades, the older they are then you start to see slowdown in the growth.

And you hope and you work on seeing accelerated growth on the new blades.

So next year, you will see slowdown in the IPS and, over time, in the application control.

And you would like to see growth.

Obviously, right now, you already see the growth that we see in anti-bot or in threat emulation is in hundreds of percentage, but the numbers are small.

So over time those numbers will be bigger, but the growth rates are faster than the old ones.

So new ones, you will see higher growth rates, and old ones, you will see slower growth rate.

And on average, you would like to continue seeing the growth in the software blade as a total.

Okay.

And then I'm just curious, more broadly speaking, these next-generation firewall platforms are in the 25% penetration range for the industry as a hole.

What kind of number do you think that goes to longer-term as you consolidate point solutions?

Does that get to 50%, 80%?

I'd just be curious, your broader concept --

I think just the term next-generation firewall, it means different things in different companies.

Right?

So for us, the next-generation firewall includes many, many additional blades and technologies for the use of the customer.

So the more customers would like to buy more technologies the more you will see it penetrating.

I think -- it [totally] was called UTM, and it included anti-virus, anti-spam, the UL filtering.

And now you call it next-generation firewall or software blades, and you add the added technologies into the platform that you're selling.

And we are offering our customers many options and many software blades that they can acquire.

And we expect more and more customers to use more technologies on their gateways.

Where will it stop, and which numbers?

I have no idea, but I think it's going to be quite high.

Okay.

Fair enough.

Thank you very much.

Matt Hedberg, RBC Capital Markets.

Dan Berce for Matt.

Thanks.

Revenue growth's been accelerating quarter-over-quarter for eight quarters now, which is really quite impressive.

Can you talk about what's driving it?

Is it simply just a function of blades hitting 20% of revenues as you've kind of talked about in answers to the last several questions?

Thanks.

I think it's part our investment in new technologies and in a better threat prevention technology; part our investment in the field and in the sand, which we are accelerating this year in a significant way.

And I think not that I want to create any higher expectations, but I think the potential is still -- I think we're still -- there's a lot of potential in providing more of these technologies to the marketplace.

And we have several more years until we reach fruition of those markets.

So still, most of the work is still ahead of us.

Thank you.

Sterling Auty, JPMorgan.

Just two quick follow-ups.

Tal, I didn't catch it if you said it, but what was the renewal rates for the software blades in the quarter?

I didn't say it.

Maybe that's why you didn't catch it.

(laughter) We don't report renewal rates, but it's pretty much steady.

Remember we said we don't report it because the number is an absolute number, means nothing, because people can move between different packages.

But in general the environment is the same.

Okay.

And then, you made a comment in the prepared remarks and in one of the answers about strength in the data center.

Can you give us some color whether that's Enterprise data center or Telco data center, and perhaps maybe which geographies you're seeing that strength in?

Enterprise data center.

And all over the geographies.

Great.

Thank you.

You notice it's quite consistent for a few quarters.

Data center is doing very well.

The 13,000 family and upward is doing well, and we see it in Enterprise's mainly and across region, as Gil said.

Got it.

Thanks.

All right, guys.

Thank you very much.

See you at RSA this week.

I know that's where all of you are right now.

And we'll see you during the quarter.

Thank you, and look forward to catching up.

Bye-bye.

Thank you.

This does conclude today's teleconference.

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