Check Point Software Technologies Ltd (CHKP) 2015 Q2 法說會逐字稿

Welcome to the Check Point Software Technologies' second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Please go ahead, sir.

Thank you, Kevin.

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

Joining me today on the call are Gil Shwed, Founder and CEO, along with our CFO and COO, 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 July 29.

If you'd like to reach us after the call, please contact Investor Relations by email at 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, the statements related to Check Point's expectations regarding business, financial performance, customers and products, including its expectations for product introductions, enhancements, and the integration of recently acquired companies and technologies; the success and broad availability of the products and technologies acquired; and the future expenses related to these recent acquisitions; our expectations regarding the introduction of new products and programs; our expectations that we'll continue to focus on threat prevention in mobility spaces; our expectations regarding demand for cyber security, and other products and solutions; our expectations regarding expanded investments, including hiring across the Organization; and our expectations regarding our business and financial outlook, including our guidance for Q3 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 July 22, 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, 2014, which is on file with the Securities and Exchange Commission.

Check Point assumes no obligation to update information concerning these 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 the 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 Tal Payne for a review of the financial results.

Thank you, Kip.

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

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

Revenues for the second quarter increased by 9% year over year, while non-GAAP EPS grew 11% to $0.99, coming in at the top of our guidance.

Before I proceed further into the numbers, just let me remind you that our 2015 second-quarter GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets, and acquisition-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 second quarter of 2015, our revenues reached $395 million, an increase of 9% compared to the same quarter last year.

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

We had success in many areas, mainly in security management products, small business appliances, as well as data center and super high-end appliances.

We continued to experience great success in our software blades, which grew by 20%, and now represents 19% of our total revenues.

This growth was across all software blades, with a nice penetration of our newly introduced threat prevention and threat extraction software blade packages.

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

Deferred revenues as of June 30, 2015, were strong at $780 million, an increase of $120 million or 18% over June 30, 2014.

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

Revenue distribution by geography for the quarter was as follows: the Americas contributed 48% of revenues; Europe contributed 37%; Asia-Pacific, Japan, Middle East and Africa region contributed the remaining 15%.

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

The number of customers with transactions over $1 million increased by 17% to 63 customers this quarter, compared to 54 in the same period last year.

Transactions greater than $50,000 accounted for 72% of total order value, same as in the second quarter of 2014.

Our non-GAAP operating income for the second quarter of 2015 was strong at $221 million, an increase of 7% compared to the second quarter of 2014.

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

In addition, recently we acquired two companies, Hyperwise last quarter and Lacoon immediately at the beginning of the current quarter.

The effect of increased costs from the enhanced recruiting and acquisitions has ramped up in the second quarter, and expected to continue to ramp up throughout the year, as we discussed previously.

GAAP net income for the second quarter of 2015 was $163 million or $0.88 per diluted share, an increase of 6% from the second quarter of 2014.

Non-GAAP net income for the quarter was $183 million or $0.99 per diluted share, up from $172 million or $0.89 per diluted share in the same period a year ago.

Non-GAAP earnings per share grew by 11% and exceeded our guidance.

Our cash from operations continue to be very strong, and increased this quarter to $193 million, an increase of 15% compared to $168 million in the second quarter of last year.

We continued implementing our expanded share buyback program during the quarter, and repurchased approximately 2.9 million shares for a total cost of $245 million.

Our cash balances reached $3.611 billion at the end of the quarter.

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

Thank you, Tal.

Good morning to all of you joining us on the call today.

In the second quarter, we continued to execute on our plan for the year, and delivered solid results.

We continue to focus on the threat prevention and mobility spaces, two essential areas for the future of cyber security.

On threat prevention front, we made a lot of progress this year.

We introduced two new technologies, the CPU-level threat emulation and the threat extraction.

These two technologies are unique in the marketplace, and demonstrate how we leverage innovation in our products.

The CPU-level threat emulation is designed to improve zero-day malware detection rates, and catch key exploit techniques utilized by hackers in its infancy, before the malware has a chance to hide itself or cause any damage.

CPU-level threat prevention is one of the most advanced techniques we know to date to catch APTs.

The threat extraction software blade attacks the same problem from a very different angle.

Instead of relying on techniques, the delay five delivery hasn't -- don't always deliver 100% catch rate, we do something very different: reconstruction of the file, which works very quickly, and in our experience, provides 100% remediation rates.

Leveraging these two technologies together, we are able to provide superior intelligence and prevention.

One key differentiation in our product is the fact that, by default, we block the zero-day malware on the first pass.

Most other solution in the marketplace today allow a malware into the organization, and only later provide modification.

During that time, the malware can infect the organization, and the administrators are left with information without always being able to remedy the situation.

Our solutions are designed to stop the infected file before they reach the network, and prevent any damage.

Let me spend the last few minutes just to educate you about our technology.

This quarter, we saw significant progress in the sales result and pipeline of our threat prevention solution.

We've added a large number of customers who are using the technology.

I believe that we're on the right track to have customers consolidate zero-day malware prevention with our platform.

On the mobility front, we made an important move this quarter by expanding our mobile security platform with the acquisition of Lacoon Mobile Securities.

Lacoon developed the best, and one of the very few, threat prevention solutions for mobile environments.

We are seeing a healthy interest in this product.

We are able to demonstrate outstanding protection.

Last quarter, we were able to block major zero-day attacks on customers who had already implemented these technologies.

In addition, our research team has found major vulnerabilities in key mobile operating systems.

Our current product is available for a limited amount of customers.

We are in the process of integrating it into our environment, and making it available for the broader marketplace in the next couple of quarters.

We've also expanded our footprint in several strategic areas of the market.

In the private cloud space, with the introduction of vSEC solution for the software-defined data center with VMWare, and in the critical infrastructure space with the introduction of our ruggedized 1200R clients, which is especially designed for extreme environmental condition and the handling of this kind of protocol.

As for the marketplace, we see increased demand for cyber security products and advanced technologies in the very competitive marketplace.

On the server side, we significantly grew our worldwide sales team this year.

We have added headcount in all regions, and in key areas such as threat prevention and mobility.

Early signs of the increased personnel are quite positive.

Our pipeline for new deal is increasing significantly, but it will take several quarters before we can see how much of this pipeline converting to deals.

Overall, I'm pleased with our progress this year.

We are headed in the right direction with the investment we are making.

I would like to see results earlier, but naturally these things take time.

This brings me to the financial outlook.

As always, it's hard to predict the future.

There are many factors that could lead to outperformance or underperformance that must be taken into consideration.

For the third quarter, we expect revenues in the range of $392 million to $410 million, and non-GAAP EPS in the range of $0.92 to $1.02 per share.

GAAP EPS is expected to be approximately $0.20 less.

This includes the effect of the recent acquisitions.

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)

Gregg Moskowitz, Cowen and Company.

First question is just for Gil, given the typical sales productivity ramp that exists in software, it would seem too early to see a benefit from your increased sales and marketing investments.

I think you effectively just alluded to as much.

So the question really is, what do you think drove the strength in the business this quarter?

Because it's clearly -- these results, across the board product revenue, bookings, et cetera, were north of what investors were looking for.

I think what we saw this quarter is the natural progress of the business.

We've started seeing some signs of the increased income.

But it's again, too early to say how big will be the effects.

But we are seeing as I said increase pipeline.

We are seeing more opportunities.

Again, at this point, it's way too early to say when will -- when and how much of these opportunities will turn into the actual sale.

I believe we'll see a little bit of that in Q4 and more of that next year.

I would just add that, specifically, this quarter, Gil related to that, we've seen the packages that include threat extraction and threat emulation picking up.

There was quite a nice and strong growth in that area, which is part of our to enhance focus area, the threat prevention in general and any of the threat emulation in the mobility, which will take time to start seeing through.

Okay.

You also mentioned that the super high-end appliances did well this quarter.

Was more of that strength with service provides?

Or was it with enterprises as well?

I think both.

A lots of enterprises but I think also a little bit of service providers.

Okay.

Then just one last one if I could.

At this point, Gil, how does the pace of sales, marketing and R&D hiring, how does that compare to what your expectations were heading into the year?

Then also just where are you primarily getting the talent from?

Actually, we are on target in all the hiring, which is a very good sign because we took very aggressive goals and we weren't sure would be able to meet them.

I think in general, we are on the headcount, some departments are slightly ahead, some departments are slightly less but the total number of employees is good.

We are getting the people from all over.

I mean if it's the R&D, then we're talking about a lot of new graduates.

But also this year, we're taking a lot more experienced, seasoned software developers more than in previous years.

Actually now, we're at the end of the school year in the university; in the summertime, we probably have more bigger recruit of school of new developers.

In the field, the people are coming from all over.

Some are coming from other companies.

Some are coming from enterprise software companies.

Some are coming from competitors.

It's a very broad set of people that we bring.

Great.

Thank you.

Brad Zelnick, Jefferies.

Gil, last we've heard the R80 release to your platform is still expected sometime in the back half of this year.

Can you talk about the extent to which R80 can be a catalyst for adoption?

Specifically, what's so exciting about it?

How it compares to other major releases?

The impact they have in your business?

I don't know what specific impact R80 will have but it's a very significant release.

I think it completely takes our managed security management part into the next generation.

If you ask customers, they'll tell you that our security management is the cornerstone of our product.

That's a very important element for them.

That's actually the only way that large customers can manage very large estates and complicated policies.

With the next generation of management, we're making it much, much easier.

We create new layers of management.

We create better ways to simplify this policy.

Things are becoming much, much faster operations, that now the operator has to wait for.

It will work instantly as you press the button.

So that's one of the reasons customers are very excited about it.

Some of that will also come on the gateway side.

Making things more integrated than the gateways.

Opening and optimizing a lot of things for the new technologies that we're bringing to the marketplace.

Even though most new blades that we're speaking about right now are also available in R77, the existing release that's shipping in the marketplace.

So I think that's very exciting things for customers.

From the management standpoint actually the nice surprise this quarter that we saw, a huge increase in sales of security management already this quarter.

I don't know some of that is in anticipation of the new software.

Because customers that get that can -- will also be able in the future to get some of the updates.

But I think overall, I think, it's a good thing in general to the marketplace.

It's very, very important differentiator when you go -- when you look at the rest of the marketplace.

We appreciate the color.

If I could just ask a follow-up, Gil.

There's concern out there that the large network equipment providers are getting more competitive in security or at least trying to.

How is the competitive environment changing especially with Cisco and Juniper?

I think we're in a very good standing with relation to some of these large networking providers.

Many of our competitive wins and a lot of our customers we convert are coming from previous installation or the installation of the large networking providers.

So, as I said, we are seeing a very healthy competition in the marketplace but I think we are winning quite nicely against the large networking providers.

Thanks for taking my questions.

Shaul Eyal, Oppenheimer.

Congrats on the good quarter.

Tal, any change in the ranking order of the best selling blades?

I'm not sure -- I recall that you just are thinking it's better we mention this (inaudible) blades.

So any color this quarter?

You have a bad line, so I'll just answers the question that I heard.

Your question is, is there any change in the order of the top five blades or the top blades.

The answer, if that was the question -- the answer is --

That is the question.

Great.

Okay.

IPS continues to be number one.

You have application control follows it.

The regular suspect, the anti-virus, the URL filtering.

I said anti-bot became number five.

I can tell you that the threat emulation is very close behind.

Got it.

Thank you so much.

Another quick one, let me stick to the channels.

Any change in recent quarters, since Fishnet and Accuvant have joined hands?

Can you repeat the question?

Any change with respect to the channels since the merger of Fishnet and Accuvant last year?

Fishnet and Accuvant.

Yes.

We work with them a lot.

They are a very good partner of ours.

Like many other partners, I don't see any material change.

We work with both sides of the house.

They consolidated their organization up.

Obviously between quarters there can be different ups and downs, different builds going through different partners.

Actually, we're here today with many other partners.

We have our President's Club event here today.

They are part of the group that have showed up here to be part and to continue to grow the business with us.

Thank you very much.

Good luck.

Phillip Winslow, Credit Suisse.

Congrats on another great quarter, particularly the deferred revenue.

Obviously, you guys continue to see healthy catch of blades but also continue to get just product growth in the appliances and the software.

I'm wondering if you can just comment on the pricing environment that you're seeing out there?

Both, comment on the core firewall but also the blades.

Any sort of change in the pricing environment, whether it be it the -- not -- in those two components or at the high-end or the low-end of the market.

Thanks.

Sure.

I always say in general, every quarter you see slightly more or slightly less discount, depends on the specific.

Most of the pressure typically comes also from the currencies.

Remember that the euro dropped versus last year or got weakened against the dollar at about 24% comparing to last year.

That puts more pressure on customers' budgets in Europe.

You see some of it in Asia as well.

Look at Australia, there was 20% decrease in the currencies.

So I think the results are quite well, taking into the account the reduction of the budgeting customers.

Bear in mind, our price list is in dollars, which means the way that we can help our customers is to help them with the -- when it's necessary, with the discounts.

Got it.

Then just one follow with that.

At one point last year, you'd talked about the Ramon office, branch office market, call it the just lower ASP appliances It was early last year.

Any sort of update there on the trends that you are seeing?

Yes.

We are seeing actually the bottom metric in the smallest lines.

So that we are seeing very healthy growth in them.

Unfortunately, there's still a very small portion of the sale.

So the impact is not big yet but it is heading in the right direction.

I think there's a lot more investment we can do in that area to grow the business with the beginning of year, started have here more dedicated salesforce for the small offices.

I think it's starting to bear fruit.

It will still take time.

Great.

Thanks, guys.

Congrats again.

Saket Kalia, Barclays.

First one for Tal, I may have missed it but did you have any comment whether this quarter's results changes your outlook for the year in any way?

No.

We keep it the same way for now -- well, for the rest of the year, right?

(laughter)

Got it.

Then the follow-up is, Tal, can you just maybe remind us what sort of revenue model Lacoon and Hyperwise had in terms of upfront versus recurring revenue?

How much you estimate they added to billings this quarter?

The simple answer is zero to very, very, very low numbers.

So the answer is zero; therefore, no effect.

If anything, the added expenses which we call investments and hopefully we will start to see results as part of the -- on threat emulation, you talked about the CPU-level technology which we believe is -- will be a significant part of the threat emulation growth in the future.

So we're investing in it.

We integrated it into our threat emulation and so on.

On the mobility, it will probably take a few more months.

It will be integrated.

It is all separately.

There's a lot of interest in the market but it will take time.

But in general, we got the revenue less companies.

So let's be a little bit more clear.

In Hyperwise, there weren't any revenues at all.

In Lacoon, there were several large customers and a little bit of revenues.

But again, it's still insignificant.

With Hyperwise, we are integrating it into our existing offering.

So I'm not sure if it will be able to measure the exact impact of our technology.

With Lacoon, it will be a different product line.

We will be able to see the specific contribution, which will have soon to our revenues.

I would treat it as attacking technology.

Got it.

Very helpful, guys.

Thanks very much.

Matt Hedberg, RBC Capital Markets.

Gil, I wanted to talk about the customers' desire to consolidate network spend.

Certainly, I think you mentioned the past R80 should help with that.

But I'm wondering, how pressing of a need right now is customer consolidation?

Or are we still more on a land grab for just organic security spend?

I think the need to consolidate security vendors is very high.

I think that customers are aware of that.

But I'm not sure if their behavior is actually showing that.

I mean, you see the -- it really varies really by the type of customer.

You see with the large customers, they are concerned about the multiple vendors.

They are investing a lot in working with different vendors.

But the current way they operate is the one that we still purchase from multiple vendors.

I think one of the biggest opportunities we still have ahead of us is to consolidate.

We've done it successfully in some areas in the past, in IPS for example.

We're doing it now with threat prevention and threat extraction.

But it will still take, a couple of more years to see how successful we'll be that cycle to consolidate with technologies and work with less vendors on that.

That's great.

Then maybe just one quick follow-up.

You mentioned VMware or VMware mentioned you guys last night on their call as well.

I'm curious, when you think about a hybrid-card, hybrid-cloud architecture -- how should identity and access management fit into your strategy here?

I think I've asked you that in the past.

I'm curious if you have any updated thoughts on that?

I think we do connect very well to a different identity and directory system than work with them.

But we don't provide today specific products in the identity and access management.

I think it remains a complementary field in our market space.

Great.

Thanks.

Gur Talpaz, Stifel.

I was hoping you could expand a bit on the FireEye partnership.

How have customers reacted thus far to the announcement?

Have you seen any sort of initial impact to blade sales?

Is it seen as a net positive to both companies?

Then going one step further, how should we think about future partnerships and the sharing of threat data across the sphere of vendors?

Thank you.

I think the overall cooperation and sharing of threat data is important for our customers.

That's the main reason we're doing that.

I think we're getting positive feedback to the partnership with FireEye and probably one of the several -- or many partnerships which we have in that space.

For example, if you look at our IntelliStore, that's another one that involves several other partners in the field of security intelligence.

We are still working on the integration, so it's still too early to say; when will we see some more results?

I think it overall will be positive.

Because I think we do have some large customers that would like to have that intelligence.

That means that these partnerships will drive them to buy more of our threat emulation blades.

Great.

Then, Tal, one question for you.

Blade revenue growth has sort of stabilized at about 20% year on year for the past several quarters.

Is that the right baseline number to think about for blade revenue growth going forward?

Because it fluctuates to the positive, to the negative.

How should I think about that number and the mechanics around it in future periods?

Thank you.

I think if you look at the last three years and as I said, actually many times, you should expect the number over time to go down, as the total number becoming very big.

Right now, it's 19% of our revenue, it grows at 20%.

If you look two years ago maybe 50% and then jump to 30%.

So by the nature of things, it's slowing down over time.

The thing that slows the reduction is the fact that we continue to penetrate into new customers and we introduce new technologies.

So threat emulation, just an example, when it is a blade or the cloud service and it's part of the subscription line, then it can help to slow that growth down.

So as part of our guidance, we took that obviously into account.

Great.

Thank you.

Michael Turits, Raymond James.

A couple of questions, first EPS beat and you did have a margin upside.

Was it -- it looked like a little less spending again in sales and marketing and R&D.

Is that a function of deferral or push out of spending?

Or did that have to do with FX?

I think mainly the FX.

Remember that we still have plans for recruiting for the rest of the year for Q3 and Q4.

So I would say I would expect to continue to see in Q3 a reduction in the growth in the operating margin.

Just to clarify, I think we've hired enough people, so we are set for the right expense level.

Not all the people that we hired in Q1 or Q2 have the full expense in the second quarter.

Okay.

Then if I could just follow-up to Phil's question.

He talked about pricing.

You mentioned that obviously price in dollars.

So you discount where necessary to help out customers.

So what is the trend there?

Have you been having to increase those discounts given that demand impact of the richer dollar?

How does that look going forward?

Yes.

Slightly increasing the discount.

Okay.

Thanks.

Alban Cousin, Arete.

One quick one on long-term deferred revenue which increased I think to 19% of total deferred.

I was wondering whether that's a longer-term trend?

Will we see longer-term -- long term deferred revenue higher proportion of your deferred revenue going forward?

Or if that's just the effect of two or three quarters?

I think it's really up to the customers, sometimes they have more budget and they would like to have the deal for a few years, sometimes it's related to obviously many of them just show loyalty and they plan to stay with us for many years, so they sign for a few years.

It's more dependent on them than on us really.

Okay.

If they choose to go longer-term, how should we think about the change to -- what does it change to the operating margin?

Or to the business model?

Not much effect on that.

If it affects anything, it's really the cash flow, right?

Because you collect many times the cash flow, the full contract.

In terms of the P&L, there is no effect.

Right.

Thank you.

Rob Owens, Pacific Crest.

A question around Lacoon Mobile.

I'm just looking for more color in terms of how you view it fitting into your portfolio?

Is this starting to foreshadow maybe increased investment around a broader endpoint play for you guys?

Could you roll Hyperwise into something like that?

Thanks.

We do have a nice investment in the entire endpoint space.

We do have research into the future -- into future endpoint platform and next generation endpoint blade.

I'm not sure how big a portion it will take in our business.

Right now, I'm not modeling it into our business.

I think with the big portion of the next generation, the endpoint is actually the mobility space.

That's where I'm focused on right now.

I think it's an under invested space in tech security.

That's a huge, huge, huge risk today when you think about the fact that all these mobile devices are everywhere.

They see everything we do.

They listen to everything we say.

They run our business data run through them.

They are submitting and connecting to the network all the time and not necessarily through the corporate security measures that are around there.

So my focus today in terms of product and market potential is in the mobility.

In terms of research, we have some very interesting innovation or so on the endpoint time.

Yes, Hyperwise can play some role into that in the future.

Great.

Thank you.

Greg Powell, Wells Fargo.

Maybe just to start, what kind of impact of bookings growth do you hope that your incremental sales and marketing investments will have?

Then, just trying to think through different scenarios, if growth were to stay at, call it, the current 10% annual pace, would that be something that would cause you to spend more on sales and marketing?

Or pull back your spending?

Or maintain your current pace of spending?

Thanks.

I think this year, we've started an accelerated planning investment in sales and marketing.

I think based on the results of that, we will decide how to invest further.

I may -- obviously, I'm shooting for a better result in the future.

I think our pipeline today shows that there is definitely a potential in that.

I think it will still take time to see how much can we see results and productivity increase or decrease from these investments.

I'm fairly optimistic at this point, but it will still take us several more quarters to see the financial model and how it works.

So, hopefully, we'll have better answers in two or three quarters.

Okay.

Then just one more, if I may?

In the past, you all have highlighted that your most mature blade, the IPS blade penetration is at about 30%.

Is there any reason that number doesn't move to something materially higher like the 60% or 70% range?

I'm just trying to think about that longer-term?

I think it is approaching that number.

I don't think 70% but I do believe we need to check the numbers.

But I do believe we did pass the 50%.

So yes, it should be higher.

We will check exactly the number, but I think its north -- way north of 50%.

Okay.

Thank you very much.

Walter Pritchard, Citi.

We noted you signed the VMware partnership in the last week or so.

Could you talk about where you see the opportunity there?

One of your competitors have seen some success integrating with their NSX product doing network segmentation.

I'm wondering if it's an area that you will focus on as well?

Or if you think that the partnership will go in a different direction?

That's a very high potential area.

We are hearing from the marketplace.

We are hearing from VMware that there is a lot of potential there in the data center.

I think the feedback as well that we are getting is that our solution is much better than offers that are available today in the marketplace.

I think that explains the motivation on both sides of the deal and especially on the customer side.

Doing that, we have better security, much better automation, which is one of the key elements, that we have better ability for remediation or containment of issues there that are in the data center.

So I think overall, we're getting a very good feedback on that.

That's what will drive that and will drive our partners in that space to invest and to [mature it there].

Again, I'm -- we are relatively -- when we've already had the lot of solutions in the virtual data center and so on, with NSX specifically, we're relative new, so it's too early for me to say what's the potential.

But we get a lot of good vibe around that and a lot of nice sign from their direction.

Then, Gil, around firewall refresh, there's an ongoing debate here.

I'm wondering if you could help us understand if you are seeing any pickup or slowdown in your install base at the pace of which they refresh versus where it was six months ago?

I don't see much change.

I mean I see -- we see all the time some customers with the refresh, some customers that are getting new products or new data centers.

Once in a while, we have some mega-deal of the customer that does a big refresh.

That is very hard to point to.

But most of our deals are sort of expansion, ongoing deals and some refresh of the -- all the infrastructure.

I will add -- I completely agree.

I will add, we have some players that are smaller therefore they don't have a bigger picture of the market.

When we look at our large install base and we see the same -- pretty much the same phenomenon for the last few years, same range that we see in terms of refresh.

I know that some reports out there that talk about a huge refresh last year therefore a low refresh this year, we don't see it at all.

We pretty much see the same trends; therefore, we see the same trends in our numbers.

Our numbers are getting stronger as a result of the new initiatives that we did, expansion, new projects that we filled with customers and new customers and threat emulation is starting to pick up and therefore, we see the increase in our numbers.

But a total refresh, we don't see a material change.

We didn't see it last year or this year.

We do see nice new projects.

Great.

Thank you.

Sterling Auty, JPMorgan.

Wondering if you could give us the -- what is the sales and marketing headcount at the end of the quarter versus the end of last quarter?

Or the end of last year?

Just so we can get a sense of the magnitude of the investment that you've made?

Actually, I don't have in front of me.

We don't even provide it quarterly.

But I can tell you that just the beginning of the year, we increased our headcount significantly in hundreds of people, many of them in sales and marketing naturally.

The growth in Q2 was higher than in Q1.

You didn't see many of it in the expense because assume that it's a -- the recruiting came in the middle of each quarter; therefore, each quarter you're missing about half of the expense of the recruiting that you had in that specific quarter.

That's why I was relating to Q3.

When you talk about R&D unlike sales, R&D's spread throughout the year.

Many of the recruiting of the R&D coming actually in Q3 when we're waiting for the graduates to finish universities, so we'll have a lot of the R&D recruiting in Q3 hopefully.

The increase you can see in the P&L.

You can see the increase -- in the R&D, by the way, you didn't see an increase because the sheqel -- or the exchange rates reduce the effects or offset the effects.

But we actually had a nice increase there as well.

In sales and marketing in the US, the dollars are the same dollars per headcount, but in Europe again, you had the help of the euro, which didn't help you -- didn't allow you to see the full effect.

We hope the currencies will stay that way.

Remember, if the currency would change the direction, it will increase our expenses to the other way.

For those that are actually going into sales and marketing, what is the focus?

Is it on lead generation?

It is trying to bring on more resellers?

Is it reducing the number of resellers per channel manager to drive deeper penetration?

Just where is the focus of where those new hires are headed?

Across the board, we have new units to promote the new focus products.

We have the new structure to handle the channels.

We have more accounts managers and actually even reduced the number of accounts per channel of managers, so they can better focus on each account.

There are people that should bring new accounts and so on.

So we have focus all over that.

We have special leases on the American technologies, so it is across the board.

Just a last quick one, any color geographically?

It looked like Europe had an uptick in terms of growth but maybe the Americas cooled off a little bit.

Any sense of any trends that you are seeing in the major theaters?

I'm not sure I heard you.

I can tell you that all the regions did well.

All of them were the high single-digits.

I think actually in the revenues, AMRO was maybe on the 10%, right?

But -- by the way, there was a reclass that we did already from the beginning of the year in the comparable of the revenue.

Do you already have it on regions?

You have it in our website already for the last two quarters.

But I'm saying the numbers after the reclass from the beginning of the year were pretty slow for all of them.

Revenues for all of them were the high single-digits.

Thank you.

Robert Breza, Wunderlich Securities.

Gil, maybe just a quick question on the 1200R security gateway appliance.

When you look at that coming out with that new product, how big can that market be?

How long do you think it will be before you become a critical player in that space?

Thanks.

I think we can become an important player in that space fairly quickly.

The challenges that we face today is very small.

The potential is very high.

If you look at every power transmission station that we have in the street, the utilities, they met every utility company, that manufacturing floor and so on.

There's a lot of infrastructure today that uses very, very old computers that have not updated that are very exposed, when it becomes connected to the network and needs to be secured.

The main challenge with that product is that the risk to the infrastructure is a very high and the need to secure them means it's critical.

We're talking about organizations that -- and especially that the production sides of them that are not very innovative in terms of their IT infrastructure.

So it takes them a lot of time to implement that technology.

But we grow that product because of the market needs, not (inaudible).

We has some several large projects that we already won and installed.

It needs that kind of controls.

Thanks.

Nice quarter.

Scott Zeller, Needham & Company.

I think there was an earlier questions around endpoint.

Thank you for your comments.

But just a more direct question.

Have you noticed a change at all in the ability to get endpoint projects actually funded?

We understand there's a lot of interest and discussion around endpoint security.

But have you seen a change in all of the ability to get funding for those projects?

Our focus for the last two or three quarters was actually on focusing on the mobility.

So we do have some nice deals that are continuing on the endpoint side.

I think that will build from it very interesting capabilities that we may decide to bring to the market in the future.

But for the last few quarters, our main focus was on the mobility side of things.

Okay.

Thank you.

Brent Thill, UBS.

Tal, just on the blade strategy, you've done very well.

I'm curious if you're finding new packaging and pricing methodologies that are resonating as you learn more.

We've seen a lot more bundling from other competitors, I'm curious if you're seeing the same trend?

I think we started the bundling in the [credology] in a smart way in 2009.

If you recall back then the software blade or what was maybe the base of software blades was in low tens of millions.

Now we're reaching to a run rate of over $300 million.

So it's quite significant now in our business.

The way that we do it was mainly packaging, like you say.

As with packaging more blades, sometimes the price can go up.

Therefore it allows you to give them more -- to give the customers more security, more capability, while increasing our total offering and total therefore a value that we get out of that transaction.

For the customers, if they refresh or maybe we can replace other solutions and then consolidate it onto our platform that can be a significant cost reduction for them, one for us.

It's increasing our ASP per unit or per customer.

We should return.

We've been seeing in the last few years and it's working very well for us and it looks like it's working very well for our customers.

Then just a quick follow-up on the long-term deferred revenue.

It was very strong.

Are you seeing any change in the customer contract duration that they are initially signing with you?

You can see the short-term increased very significantly as well.

Short-term was a 12% growth year-over-year.

If sequentially, we typically see minus 1%, minus 2%.

We actually saw zero.

So we had quite a strong deferred revenue in general.

In the long-term, I would say we see -- it depends on which quarter.

In the last few quarters, you're right.

We've more customers finding the onset longer-term contracts.

Typically it's strategic customers that knows there going to be with us for a long time.

Many times they are refreshing the whole install base and they're having a hold deal for the next few years.

Thank you.

(Operator Instructions)

Thank you.

That concludes our question-and-answer session.

I'd like to turn the floor back over to Management for any further or closing comment.

Just one thing before we close out; I just want to reiterate the guidance just so we have it clear.

For the third quarter, we expect revenues in the range of $392 million to $410 million.

Non-GAAP EPS of $0.92 to $1.02 per share.

GAAP EPS is expected to be approximately $0.12 less.

With that, thank you all for joining us today.

We look forward to seeing you during the quarter.

Thank you.

Thank you.

That does conclude today's teleconference.

You may disconnect your lines at this time.

Have a wonderful day.

We thank you for your participation today.