Check Point Software Technologies Ltd (CHKP) 2015 Q3 法說會逐字稿

Greetings, and welcome to the Check Point Software Technologies' third-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 E. Meintzer, Head of Global Investor Relations for Check Point Software Technologies.

Please go ahead, Mr. Meintzer.

Thank you, Kevin.

I'd like to thank all of you for joining us today to discuss Check Point's 2015 third-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 November 1. If you'd like to reach us after the call, please contact Investor Relations by e-mail 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 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 and enhancements; our expectations regarding the introduction of new products, programs and the success of those products and programs; our expectations regarding demand for our solutions; our expectations regarding expanded investments, including hiring across the organization; and our expectations regarding our business and financial outlook, including our guidance for Q4 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 October 26, 2015, which is available on our website, or 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 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 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.

Great, thank you, Kip.

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

I'm pleased to begin the review of the third quarter.

Revenues for the third quarter increased by 9% year over year, while non-GAAP EPS grew 12% to $1.04, exceeding the top of our guidance.

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

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.

Our revenues reached $404 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, especially in data center and mid-size clients as well as all security management products.

We continued to experience great success in our custom blades, which grew by 19%.

This growth was led by continued penetration of our newly-introduced threat emulation blade, as well as anti-bot and application control blades.

Our software update and maintenance revenues reached $189 million, representing 7% growth year-over-year.

Deferred revenues as of September 30, 2015, reached $772 million, an increase of $112 million or 17% over September 30, 2014.

As you can see, short-term deferred revenues increased by 13% year over year, with a 3% decrease compared to a prior quarter, as seasonally expected.

The revenue growth was across all of 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 continue to see strength in our large deals.

The number of customers with transactions over $1 million increased by 14% to 50 customers this quarter, compared to 44 in the same period last year.

Transactions greater than $50,000 accounted for 70% of total order value.

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

Our operating margins decreased to 56% from 58% last year, and the results have increased costs from the enhanced recruiting and acquisitions earlier this year.

Our non-GAAP operating income for the third quarter of 2015 was strong, $228 million, an increase of 6% compared to the third quarter of 2014.

GAAP net income for the third quarter was $168 million or $0.92 per diluted share, an increase of 9% from the third quarter last year.

Non-GAAP net income for the quarter was $188 million or $1.04 per diluted share, up from $177 million or $0.93 per diluted share the same period a year ago.

Non-GAAP earnings per share grew by 12% and exceeded our guidance.

Our cash balances reached $3.612 billion at the end of the quarter.

Our cash from operations this quarter was very strong, $228 million, an increase of 13% from $202 million in the third quarter a year ago, mainly as the result of very strong collection from customers.

We continue implementing our expenditure buyback program during the quarter, and repurchased approximately 3.1 million shares, for a total cost of $250 million.

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

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

We continued to execute on our planning in the third quarter, and delivered excellent service (technical issue).

We continue to focus on securing the future of cyber security.

We're launching the big online campaign and highlighting Check Point's One Step Ahead initiative.

Our commitment is to stay one step ahead of cyber criminals, one step ahead of the industry, and to provide technology that is one step ahead at all times.

You can see great evidence we've reached in the past quarter.

While many in the industry are solely focused on network and PC-based security, we've launched our first mobile threat prevention security solution for our customers.

In contrast to other vendors, technology that provides detection and post attack analysis, our new SandBlast technology that was announced this quarter prevents the malware before it has the chance to damage the organization.

This quarter's introduction of SandBlast Zero-Day threat prevention turned into immediate success as customers embraced the new set of technologies.

SandBlast is the only solution in the marketplace that combines advanced sand boxing with our unique CPU-level threat emulation technologies and threat extraction technology, that strip files of unknown malware before allowing them into the organization.

Another example of our ability to stay a step ahead of the industry is demonstrated by our leadership position in the latest NSS Labs breach detection test.

We scored 100% catch rate for HTTP unknown malware, 100% for email unknown malware, 100% for drive-by exploit, and 100% for stability and reliability tests.

This test was completed even before the implementation of our CPU-level detection and threat extraction technology into our product.

When comparing to some of the perceived leading vendors in the category, one scored 59% success in most of these tests, and the other simply threatened with legal action if the results were published.

We should work harder to expose the difference between marketing hype and technology that actually works.

There are several other fronts we've also made progress this quarter.

One is cloud security, in particular, our solutions that provide virtual security for private clouds.

We launched our vSEC solution for VMware NSX, and partnered with VMware to promote it.

Mobile Devices are becoming the back door to the enterprise, and it is critical to address this exposure.

We launched Mobile Threat Prevention this quarter, a solution that prevents zero-day malware on smartphones and tablets.

Mobile Threat Prevention supports both Android and iOS, and has already exposed unknown malware coming from our early customers.

Mobile security is a greenfield in the security marketplace.

I believe that it presents an important opportunity, and we're several steps ahead of the industry here.

Many of our investments in advanced technologies have demonstrated good results this quarter.

Our [mobile] threat prevention and SandBlast technology, as well as our anti-bot technologies continue to lead the growth of our software base.

We are making bigger investments in marketing activities this quarter, in the form of [compaign] more customers and partner events, and a new cyber day conference with senior level executives educating about the advancement of the fresh landscape and model research.

With this on our side, we significantly grew our worldwide sales through this year.

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

Early signs of the increased personnel continued to be quite positive.

Our pipeline for new deals continues to increase.

The investments we've made are headed in the right direction, but naturally takes time for these investments to bear fruit.

This brings me to the financial outlook.

So it's hard to predict the future, and there are many factors that can lead to outperformance or under performance that must be taken into consideration.

For the fourth quarter, we expect revenue in the range of $440 million to $470 million.

Non-GAAP EPS is expected to be at the range of $1.10 to $1.18 per share.

GAAP EPS is expected to be approximately $0.12 less.

This included the effects of our recent acquisitions.

For the full year, that translates into revenues in the range of $1.612 billion to $1.642 billion, with non-GAAP earnings per share in the range of $4.08 to $4.16.

GAAP EPS for the year is expected to be approximately $0.45 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 today is coming from Brad Zelnick from Jefferies.

Thanks very much, and nice quarter.

On margins, margins in Q3 were higher than you last guided us to, and also the margin that you've guided for Q4 also looks above what the Street's expecting, and it begs the question, Gil and Tal, are you investing enough?

Are you able to hire at the rate you need to, because it feels like there are others in the market taking a longer-term view, spending like crazy, incentivizing the channel.

Why not spend more today to acquire customers that you can renew and refresh in the years to come?

I think first it's a very good insight, and we will definitely take it into consideration.

And I think this year, we were aided a little bit by the strength of the US dollar, but the result has been better than expected margins, because our non-US expected became lower, and I think the main focus that I have is to be effective.

Every person that we hire should be effective.

We should build the right operational structure to do that, but we're definitely taking that comment into consideration, and we will positively consider to invest even more.

Thanks and just one follow-up, if I could.

Tal, can you remind us appliances as a percentage of product revenue?

It's a data point I don't think that we've asked about recently.

Is there reason to believe, as the world moves to public cloud and virtualized infrastructure, that we may see trends over the last decade actually move in the opposite direction?

Do you think you'll see over time customers maybe taking more software and virtual product and less hardware?

So first I will say we stopped reporting because by far the majority, so it was relevant when it was 30%-70%.

It's way over 90% by now, so I would say a majority of our products revenues and bookings are relating to the appliance.

Software blades is naturally part of our total product, and software blade revenues that are software naturally.

And you're right, that even with this significant trend of people moving to the cloud, you can go back and increase the portion that is not attached to an appliance.

And this quarter in particular, because we did see the revenue from software actually going quite up a little bit.

But it's margin now for the total number, Gil.

Thanks very much.

Thank you.

Our next question today is coming from Shaul Eyal from Oppenheimer.

Two quick questions on my end.

Tal, can you ramp for us, you always do the blades this quarter?

Clearly a lot of progress on the threat emulation and the anti-bot, but just want to see where we stand with some of the other blades.

Yes, so I would say if you'll recall, we always say in terms of size, IPS is the largest one, then Application Control, then we have the new email filtering and anti-spam, depends which quarter.

But five and six are now anti-bot and the threat emulation, and now there's a fair competition between the two, threat emulation is growing very nicely, way over 100%, and we've increased significantly.

We now have a number of customers that acquired this quarter either the appliance or the cloud service on the threat emulation.

We see a very nice success both in booking and naturally translating to revenues over time.

Also, a number of customers that are using the blades and in the POCs that we see in that area.

So threat emulation is definitely growing fast, and I wouldn't be surprised if next quarter, that will be the number five blade.

Got it and in that context, Hyperwise and Lacoon, Gil mentioned the endpoint, and Gil also mentioned the cloud.

What can you tell us about the integration of both of the recently acquired assets?

I think integration is going very well, and just this quarter we introduced the SandBlast which already includes the Hyperwise technology, and we introduced the mobile threat prevention, which is based on the Lacoon technologies.

So I think that in less than six months, we were able to complete the product integration, launch the product and start much more proactive integrated sales efforts.

Thank you, and good luck.

Thank you.

Our next question is coming from Walter Pritchard from Citi.

Just to follow-up on Brad's question, Tal or Gil, you noted that the US dollar is helping you out from an expense perspective.

Could you just clarify what the constant currency OpEx growth is, so we can make we understand how to factor that in going forward?

And I guess, Tal, when we saw you last at a conference, you talked about wanting to see the return from investments that you were making, in order to decide whether or not it made sense to invest at a heightened rare going forward.

Could you help us understand what signs you see so far, that either encourage or maybe dissuade you from continuing this elevated level of investment, and how we might think about that as we look into future quarters?

Sure, first related to the dollar versus the different currencies around the world, and in fact it worked well for us this year, the dollar got stronger versus most of the currencies.

For us, the main currency is number one the Israeli shekel, number two the Euro, and both of them got weaker versus the dollar, so it helped.

It was probably this quarter $8 million or $10 million difference.

Bear in mind that this is a simplified way to look at it, because the only thing we can calculate clearly is the effect on the expenses, but I have no doubt that the effects on the revenues were significantly larger, and it actually hurt us, because customers around Europe, if they lost 20% of the budget they're spending due to FX, and the correlated drop in the bookings are affected by that.

So net-net, I'm not sure we gained from the dollar.

On the expenses would be, on the booking and revenues, I'm sure it's actually slowed down the growth.

So that's in terms of the dollar FX.

When it comes to the spending, we said, we came up with the beginning of the year, we said that we would invest significantly both in R&D and in sales.

We started to see a very nice growth in the pipeline.

We said it's going to take time to see the effects on the booking.

We said that the expectation it will start to effect next year.

You're right when you say, I think there was a question of one of the analysts before, when he said we our competition continues to invest.

So of course, now in the market, with everybody continuing to invest heavily, which is relating to the question of when we get to that, we need to talk Q4 to see where we are at the end of the year, and make the decision regarding the continued investment next year, and how strong it's going to be.

It's a bit too early to discuss that at this point in time.

The next question comes from Gregg Moskowitz from Cowen and Company.

Thank you very much.

Tal, your seven-figure deal activity was healthy again, although it was a bit unusual to see the dollar value of bookings over $50,000 decline by a couple points as a percentage of total.

Just looking on a year-to-year basis, does that reflect more traction with your small business appliances, or was there another dynamic that we should be aware of?

So no dynamic.

I always say that I provide it to you because you used to get it, but I don't think that it's important data.

So its moved from 72, 71, 72 to 70, pretty much, so nothing relevant.

And then Tal, last quarter I think you had mentioned that you saw a slightly increased discounting level.

Was wondering how you would characterize the third-quarter activity, just as it relates to pricing.

Thank you.

I would say similar, you see, for the last two years, you've seen certain quarters with slightly more discounts.

Q3, by the way, because it's always a very slow quarter, everybody is on vacation, so you typically see slight increase in the discount.

There we did see some increase there, but again, nothing overly dramatic.

Okay, great.

Thank you very much.

Thank you.

Our next question is coming from Philip Winslow from Credit Suisse.

Congrats on a good quarter here.

Just have a question on product revenue, and really sort of the pricing environment that you're seeing out there, as well as the demand environment, as well.

This is the, I think, seventh or eighth consecutive quarter accelerating product growth, and accelerating revenue growth.

Within that back drop, what is the pricing environment that you're seeing versus competitors, and what does the general in-demand environment look like?

The main competition is driven today just by the price.

Of course the markets remain very competitive, and I think it's a great market for making vendors compete with their customer, but I still think that most of the wins should come from the value that we provide, and in many cases it always provides.

In that respect, we remain in a very competitive market.

I think the level of the competition of our marketplace is higher than it's been several years ago.

I would just add, there's two phenomenons right now.

On the one hand, there is more competition, which we can all see.

On the other hand, it's a good market, it's a strong market.

There's more demand, there's more awareness, more events that make customers rethink their security infrastructure.

So you have also many new opportunities.

That's why, if you'll recall, we discussed the focus for this year when we said we believe mobility in the long run will become a big market, that's why we want to be a leader there.

That's why we have technologies right now including the level that is ahead of the market and the threat emulation or zero-day attack/anti-bot that we are ahead in terms of the quality of the solution and would like to continue pushing it.

So I think there's many exciting opportunities out there.

And actually in a good market, you'll see more competition, so it works in both ways.

Got it.

Thanks guys.

Thank you our next question today is coming from Michael Turits from Raymond James.

Can we talk about the geographies a little bit, and maybe you can talk to them relative to bookings, since we only see them on a revenue basis.

But it did seem as if, I calculated the Americas did slow.

Was there any slowing in US enterprise, because we did see some deceleration in your revenue growth rate there.

I can start and then Gil can add.

So what we see is like we see every quarter, different colors in different regions.

I would say we have seen Europe was very strong, product revenue strong double digit.

We saw very nice in Asia-Pacific growth, pretty much across the country.

In the US, we saw a nice growth in many regions, within some regions that had slower growth.

In total, you can see in the revenues that it's higher than mid single digit growth, but not as fast as that region this quarter.

Bear in mind that many of the significantly large moves here are contracts coming from the US, so it can affect the booking and fluctuation of that.

Okay and just to get it straight, did you say, especially since Europe you said was strong, I thought Tal, just to be clear, you said that I think the stronger dollar was having a negative impact in bookings, obviously not in local currencies but in dollars.

So can you clarify that, especially since Europe was strong?

Sure.

I said that the numbers could have been significantly higher if you don't have the effect of these currencies around the world.

Having said that, we still did very nicely, both in AMA and in Europe.

We can only speculate that if the Euro was strong, then all the results in Europe would have been, I don't know, 10% to 15% even better, but it's speculation.

But definitely for the customers in Europe, their budget was relative in terms of dollars.

Yes, and I don't know.

It was a little hard to hear.

Just on the US enterprise side, you said some regions up, some regions down.

Just could you clarify that for us, because some of your competitors reported weaker US enterprise this quarter?

Sure, no.

I said that third quarter, US and both in Europe, and it's not a clear picture all the regions, all the time, growing.

This quarter like you see in many quarters, you feel some regions did very well, double digits and some regions did less.

Within the US I'm talking, yes, sorry for the clarification, but it's within the US, some regions did better than the others, and in general, Europe was the one that was stronger this quarter.

Okay, thanks very much.

Thank you.

Our next question today is coming from Daniel Ives from FBR.

Gil, do you, in terms of just what's happening in the market, are you seeing any changes competitively where you're seeing vendors go to maybe more suites from these vendors, or were there broader product platform especially as they go higher into the enterprise?

Just given some of the weakness we've seen from some of the smaller players in security over the last month or two?

Not really.

Again the market remains very competitive, but I don't see that our vendors are trying to roll their suites to cover additional areas of security.

I think quite the opposite.

I think we see a lot of vendors that are specializing in a certain area.

I do believe that we do offer a growth platform for the network security needs, and I think we're building the best platform to date also for the mobile space, but I don't see that in regard to market is changing.

And then just in terms of acquisitions, is there any, especially in 2016, maybe reiterate if there's any change in thoughts there as some of these new product vendors are struggling.

Is that an opportunity for you to pick up more technology, expand the suite?

How do you think about building it versus buying it?

Thanks.

Sure, there are more opportunities today.

I think in the last few months I've seen a little bit, the high level slightly more opportunity, but I think the evolution of many cyber security.

If I look at large companies, we can see from trends in the marketplace that shows there may be theoretically more opportunity for us there.

If I look at the other side of the market, more technology acquisition, clearly the fact that there is many, many, many cyber security companies means that some of these companies are going to be for sale.

Most of them want to be able to survive on a standalone basis, and eventually we will be able to acquire more technology.

We acquired two pretty dramatic technologies and I think they are at a very critical area of our strategy.

Threat prevention and mobility.

Thanks.

Thank you our next question is coming from Saket Kalia from Barclays.

First, just a tactical one for Tal.

Did you see any change in renewal or attach rates on software blades or maintenance in the quarter?

It looks like billings from subscription and maintenance slowed down a little bit from what you'd been doing previously, in the double digits.

So is this the law of large numbers or something else?

I think that it's law of large numbers, and also remember, you can see very clearly when you look at the deferred revenues long term, you'll see the short-term growth rate for some, which is quite nice, right?

When you look at the long term, it grew 9%, while in Q3 last year it was 21%.

So obviously in the long term can fluctuate.

That's why I always say long term contract can fluctuate, and can be quite significant and you can see very clearly when they are coming in because it's big numbers that it comes into the numbers.

This quarter, we had less long-term contracts, not surprisingly, in Q3 as well don't forget, but this can even happen in Q4 in any quarter, just because it's the nature of the beast.

It can go up, it can go down, and it can fluctuate.

You can have contract of $20 million or $30 million or $10 million that can change your numbers.

So bookings, and by the way, that's the reason why we don't report bookings, because it can be misleading to the run rate of the Company.

I see.

So just to clarify that, you're saying the sequential increase in long term deferred wasn't as big as maybe you saw in last Q3, because of some of those large-term contracts and that may maybe impacted the year-over-year?

Is that the right way to think about it?

Yes, you can see that the year-over-year last year, the short-term, let's look.

Q3 last year, the short-term grew year-over-year again, right?

9%, and actually this quarter year-over-year is doing 13%.

When you look at the long term deferred revenues, last year it grew in 72%, right?

And this quarter it grew at 38%.

So naturally it affected the growth there, so there's long term, and the fact that we do know that we had less new contracts this quarter, just as the facts right?

Got it.

That's very helpful.

And then maybe a strategic one for you, Gil.

The focus on mobile security is very evident in all of the product announcements on the call.

Longer term, how do you see the ecosystem for mobile security playing out, particularly regarding some of the handset makers and app developers, how does that play out and where do you see Check Point in that ecosystem?

There are vendors on, I think generally speaking, like in any platform I've seen in the computing space, there are vendors that worry about providing better operating systems, better application and there should be vendors that worry about securing the whole infrastructure, and that's almost never the focus of the developer themselves.

I think that we have an important role.

Within the space of mobility, there are other solutions like solutions for device management, for MDM today, that are I think very complementary to what we are doing, but I think they're mistaken for security.

They are not security, they are device management.

There are containers that will allow companies to separate between the business data and the private data, and also help a little bit in securing data.

I think we have one, and I think it may be better in some areas, but that's the space that already exists.

The space that we are pioneering is the most important one in the space of working malware that gets over our phone and that malware is the most dangerous.

That malware basically listens and feels and watches everything that goes around us, from this conversation to the data that's flown through the device, to the data, by the way, that can go on the Company network.

Remember when you hold your cell phone inside the Company network, you can be an interception point for the network traffic inside the Company, and these devices, that you know are ubiquitous, they are everywhere, and they send data all the time.

They are always connected, and they are usually connected not through the Company network.

So that's why it's so important to secure them, and I think that it's pretty easy to show how these devices are becoming a huge security threat, and they are.

We are seeing real attacks in the real world, and unfortunately the level of where it is today is too low for that, and I think it will change.

Understood, thanks much.

Thank you, our next question today is coming from Karl Keirstead from Deutsche Bank.

Gil and Tal, I wouldn't mind just asking about the Q4 revenue guide.

I think the midpoint assumes 8% revenue growth.

I'm just curious what are the key assumptions that are informing that guidance?

Are you assuming some lift from the sales rep build out in the first half?

Are you assuming perhaps some caution as certain geos around the world are a little bit soft?

Maybe, love to get some color on to your thinking into that guide.

Thank you.

I think in the forecast, first, we have a range but also in the forecast, I think we're taking many data points we're taking some run rates that we've seen.

We're mainly taking the forecast for our salespeople, and we're taking other plans that we've made and things that we see in the industry.

Based on the number itself, I think it's a good enough number, very nice range in it, but I see that we're not obviously taking a huge contribution from the increased sales force.

It still has time to come in the future.

Okay, thanks, and then Tal, if I could ask you on the CapEx guide, I think on a prior call, you had hinted it could come in at $40 million, but it would be quite lumpy, given that there's is some facility build outs.

It looks like in the third quarter it came in a little bit lighter, so maybe it's just a function of some of those CapEx expenses getting pushed out a little bit.

Could you update us on CapEx this year, and if possible, next year?

Thank you.

Yes, it relates specifically to the CapEx that was extraordinary, which was building the building, and I said it's going to be not $40 million but actually $60 million.

I said since it has to do with the timing of the buildings and the debt assumption I could give you at the beginning of the year, is that $30 million this year and $30 million next year.

You can see you have less this year because it takes -- most of the payments will actually come more towards next year.

So maybe the new contribution will be $15 million total this year and $45 million next year.

That's the best update I can give you now.

Very helpful, thank you.

Thank you.

Our next question today is coming from Sterling Auty from JPMorgan.

Yes, thanks.

Gil, when you look at threat emulation and SandBlast and anti-bot in terms of customer adoption, are these solutions that are being purchased after RFPs, or do you find that customers as they're going through their normal refresh cycle or just buying pattern on their firewalls just are adding it on, because it's an area that they want to add?

I think that it's all of that.

A few companies that have higher fees, many companies when they do the refresh cycle, or they look at new technologies, have the opportunity to think about introducing those technologies, and I think that it will continue that way.

I think overall the adoption level of these technologies like sand boxing and so on is still too low in the marketplace, in my opinion.

When you the threats, when you look at the attacks, you see that.

When we look at all of the layers of security that we can provide, customers are not protected today.

Customers don't do the maximum that they can in order to get the layers of security that we need, and that I think calls for all of the marketplace.

On one hand, the awareness level is high and the activity level is high, and on the other hand, actually both mid size and large companies and small companies don't translate it into actual buying or infrastructure technologies.

I would just add that remember that as a result of the consolidation and the ability to portray many or most of the blades on one platform, one appliance, it creates an ability for us to give better price for the customer, not only in terms of dollars, but also his ability to manage all of the different security solutions in one platform, which is much simpler, and therefore creates many of the blade elasticity in the market, that increase the demand, because many customers now can afford it, both in terms of management capabilities and also pricing.

Right, and is there, do you have a sense yet whether customers that have purchased these solutions are actually turning off other legacy, whether it be intrusion detection or other signature-based technologies they are replacing with these solutions?

I think that they do.

I think we are seeing good evidence for consolidation, because I think with the old IPS industry in the very beginning slide, and almost all of the new solutions that are purchased, it's just integrated into a consolidated platform.

And last quick question, Tal, in terms of the multi-year contracts, what are the solutions that are most prevalent in terms of customers, when they choose a multi-year option?

It's really most of the time, relates to their budget and what's comfortable to them.

Some time it could be just the update and maintenance, instead of one year, they take two or three or maybe four, so it's related to budget of customers, but we do see a lot also in the software blades where customers are taking a multi-year contract.

Okay, thank you.

Thank you.

Our next question today is coming from Rob Owens from Pacific Crest Securities.

Tal, I wasn't exactly clear around your geo commentary earlier, and as I look at the Americas, it's decelerated for the last year.

I understand there's a difference between bookings and how we see revenue, but can you just give us some color in terms of what you're seeing, why that has decelerated for the last year, and what current bookings rates look like?

Thanks.

I think it does, and you're right there's a different picture between the revenues and the booking.

In the revenues, it was pretty much between the 5% to 10% over the last year, so don't think there was anything major there.

The reminder, we talked about competition and we talked about some price pressure that can also slightly affect the growth rate in those regions.

So are you seeing more price pressure in the US than you are in Europe at this point, because Europe has accelerated nicely on a year-over-year basis?

We see similar pressures all around.

Second, can you update us on what renewal rates look like for your different blade offerings, whether those are attached or purchased on a single basis?

Can you repeat the question?

The renewal rate for blades.

Renewal rates for blades.

They are very similar.

Again, remember the majority of our software blades now are already unbundled.

Right?

We have them bundled with the appliance, and a majority is on bundles, and the majority of the bundles, is obviously renewals and we see similar renewal rates.

Great, thank you.

Thank you.

Our next question is coming from Alban Cousin from Arete.

Just a very quick one on the investment level in the business.

I was wondering whether you could give us a sense of how staff or headcount has evolved year-over-year that might help us understand what's happening behind the FX changes?

I think we added a little bit more than 600 people to our headcount since the beginning of the year.

It's about, it's roughly 20% increase compared to Q3 last year in the overall head count in the Company, and I think that we'll keep investing in hiring people.

The hiring patterns are different between quarters, for example, in the first half focus, we're focused more on hiring salespeople.

In the last quarter, we've focused more on hiring other functions, but it's a function of multiple things.

Part of it for example, is that a lot of the developers are hiring graduates who have just finished their school year in the third quarter, but that varies, I think we will continue to hire more people.

Great, thank you.

Our next question today is coming from Jonathan Ho from William Blair.

Just wanted to understand, going back to the impact from currency, are you seeing that show up a little bit more in terms of customers buying smaller boxes or smaller deployments than they usually would, or is this showing up more on the subscription side, in terms of a la carte blades or blade packages that they are trading up to?

I'd say first more generic, actually.

Remember this is Q3.

Q3 is one of the weakest quarters of the year.

Most of the quarter, people are on vacation, so I wouldn't conclude too much in any area, based on Q3, that's one comment.

Having said that, if you look at the last year or even two, you'll see that usually when we talk which appliance is net the growth, it typically actually comes from data center and the high end.

This quarter, it was both data center and the mid-size appliances, so I wouldn't say we see them going into smaller boxes, because of budget constraints.

I don't think so.

Got it, and then, as we look at some of the channel investments that you have made, can you talk about maybe where you have felt particular success, maybe what segment of the market you're seeing those investments pay off in, and where you see additional opportunity to invest?

I think it varies every quarter.

Last quarter, for example, in security management, data center and the mid size appliances, we saw great success.

In other quarters, we've seen more enterprise grade appliances.

I think the one thing that remains actually quite strong is the data center appliances, where for us, and that remains in the last few quarters consistently going well.

The others have shifted.

Some quarters, the mid size or better, some quarters, the enterprise were better, some quarters the super data center, the technical blade equipment was better.

So that really varies, and in terms of areas of investment I think all these areas are good areas for investment.

I think we are also investing, and if we're looking at verticals and we're looking at the critical infrastructure, we're looking at the cloud, the data center, it's a new area, it's a new focus area for us, and I think what I've already said many times, mobility and threat prevention are areas that we invest.

So these are the four major areas that we're investing.

Great, thank you.

Thank you.

Our next question today is coming from Matt Hedberg from RBC Capital Markets.

Gil, I wanted to circle back on SandBlast.

In your mind, how does it differentiate versus other ABT solutions out there?

And over time, would you expect pricing to be more commoditized for this?

I think there's some that believe ABT gets more pronounced when you see further consolidation in price points there.

Thanks.

The question if we expect to see commoditization in the pricing of the threat emulation?

Correct, yes, over time, and the key differences that you're seeing versus competitive solutions?

So I think in terms of the price I don't know.

I think our price is very reasonable because we don't sell standalone super expensive infrastructure.

The incremental cost of infrastructure is actually quite reasonable.

And in terms of the differentiator, I think the big difference in what we are seeing, first the CPU level threat prevention knows how to detect threats that are not detected by any other solution because it happens before the threat actually happens.

And I think our overall catch rate, and I think we've proven it is quite good, and the NSS last quarter was very indicative of that, and I think that's a good thing.

I think, in terms of the deployment option we have more deployment option, it can be more cloud infrastructure, it can be on the dedicated appliance infrastructure.

Ones that, by the way, unless we see a trend in Europe, people prefer the in-house appliances, I think for concern of privacy and exposing their data in the US.

More people prefer the cloud service, which is very economical and very easy to use, it's a utility, so that's an average trend.

I think the biggest, actually two critical differentiators that we have a differentiator in our solution, is the fact that we actually block the threat.

Our threat extraction technologies allow companies to transfer the files very quickly without -- with minimal delay, delay of seconds, which is not again, not meaningful, wide stripping the unknown malware, and that's unique to us, the threat extraction.

And the overall threat technology that we have doesn't transfer files until they are being infected.

That's the not the case of most of the competitors.

Most of the other competitor products are either designed to be used in the way that first lets the infected files go through.

These files might cause damage, and half an hour later or two days later, you get a report that says you've been infected.

I don't think that's the effective way of doing security, and I think it's a big differentiator between us and other products.

We prevent the damage from happening.

Many other vendors that call it threat prevention actually allow the damage to happen and report to you after the fact, and that I think is the biggest item that we have.

Thanks, Gil.

Our next question today is coming from Scott Zeller from Needham & Company.

Two part question.

So the first is, I think a number of us on the line are questioning what's going on in the US, based on what we're hearing from your competitors, and also our own field discussions.

Can you comment on whether or not what we're seeing is more of a move back to typical behavior, and maybe moving away from hysterical buying that we've seen in the past several quarters, more moving back to a normal seasonality?

And the second part is, given what I just mentioned, do you still have confidence in the typical seasonally strong Q4 move in buying?

I think when we see the analysis of next quarter, how it shapes up between the quarter, I think the behavior that you're seeing from vendors, contrary to us, because I'm asking our customers why do they have these changes in behavior.

Okay, thank you.

Thank you our next question today is coming from Gray Powell from Wells Fargo.

If you had to estimate from a market perspective, what percentage of enterprises do you think are running multiple functions like IPS, URL filtering or APT detection on one firewall appliance today, and then where do you see penetration of platform solutions going longer term?

I think if you talk about the first IPS, URL filtering, I think it's today more than 50% of enterprises, still not 100% but I think probably more than 50%.

If you are looking on APT detection, I think most companies, it's single digits.

I don't know if it's 1% or 5%, but it's a low number of companies today.

And then just asking the same question from a different angle.

What percentage of your customer base is just running a naked firewall with no blade subscription attached?

I would say that many customers since we introduced the software blade are buying the bundle package.

It depends which blade, but I can take in one from depends on which blade from 5% to 35%, or even 40% if you get to the IPS, so I'd say a majority don't have most of our blades, therefore they represent a really nice opportunity for us.

Got it.

Thank you very much.

Our next question is coming from Shebly Seyrafi from FBN Securities.

So your product gross margin increased nicely at 82% from 80% and change in the first half of this year.

Can you talk about what drove that, and how sustainable that is?

You did note that your -- I guess your high-end appliances did well, data center appliances did well.

Do you expect that to continue to be the case?

Thanks.

I think if you talk about the total gross margin that obviously software blades are increasing in strong double digits, and product was 8%, 9%, 7% depends which quarter.

If you talk about the software blade, it is 20% on average this year.

Software blades carry much higher margin, and software blades around 97% margin.

So naturally software blades take bigger portion of the price, then the margin can go up.

So I think that it depends what drives the growth factor in that specific quarter or in that specific year.

Okay, and also on your unit growth, can you talk about unit growth versus ASPs last quarter?

ASP usually is steady, so there's nothing dramatic in there.

It depends, the ASPs can be affected by the mixture of the products, so ASP for our products remain stable in general.

The mix shift depends.

Remember this quarter we had a lot of mid sized nice growth, so that can pull the average slightly down, but in general, we see stability there.

But what about units?

Unit growth?

Yes, we saw nice growth.

We just don't report the break down.

Okay, thank you.

Our next question today coming from Fatima Boolani from UBS.

Good afternoon.

This is Fatima on for Brent Thill.

Thanks for taking the question.

I just wanted to go back to your comment around the majority of your installed base not having most of your blades, and that being a good opportunity.

I'm wondering to what extent the investments you've made year-to-date have impacted new customer acquisitions?

So if you can help us understand what the new customer acquisition pace has been this quarter, and the last couple of quarters, and how their typical initial purchase compares to that of a purchase from the install base?

I think every quarter, we had a few thousand new customers.

We don't report that number, but I think we have much more potential to acquire even more new customers, and I think some of our new technologies are going to be appealing to new customers, and I definitely think that we can do more on that.

But I think overall, if you look, we have a pretty healthy number of new customers joining us every quarter.

And a quick follow-up for me if I could.

You had introduced some industrial control systems, security appliances earlier on this year, and I'm wondering if you can help us think about the opportunity here, and why this isn't really a focus for critical infrastructure companies?

And that's it for me, thank you.

I think that it's absolutely the potential for critical infrastructure.

The industrial appliances that we have are targeted at that critical infrastructure.

I think we are looking at many, many projects in this space.

Most of them, by the way, are infrastructure projects, so they are long term projects, they are relatively slow industry but we are very large projects to many thousands of units, and I think we have a unique value proposition on that space, both in terms of the software, and in terms of the hardware that needs to be recognized, and sustain a lot of environmental conditions that other devices cannot sustain.

And as I mentioned, we see one of our four vertical areas we are investing in and I think in the next year or two, we will start to bear fruit.

Thank you.

We have reached the end of our question-and-answer session.

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

I'd like to thank you guys for joining us today, and we look forward to your calls and seeing you during the quarter, and we'll see you next quarter, also.

Thank you, and have a great day.

Bye-bye.

Thank you.

That does conclude today's teleconference.

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We thank you for your participation today.