Check Point Software Technologies Ltd (CHKP) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Check Point Software Technologies first-quarter 2016 financial results.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

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

Thank you, and I would like to thank all of you joining us today to discuss Check Point's 2016 first-quarter financial results.

Joining me on the call today from the French Riviera are Gil Shwed, Founder and CEO, along with our CFO and COO, Tal Payne.

As a reminder, this call is webcast live on our website, and is recorded for replay.

To access the live webcast and replay information, please visit the Company's website at CheckPoint.com.

For your convenience, the conference call replay will be available through April 27.

If you would like to reach us after the call, please contact investors relations by email at Kip@CheckPoint.com or by phone at +1-650-628-2040.

Before we begin with management's presentation, I would like to highlight the following.

During the course of this presentation, Check Point's 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 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 success with those products and programs; our intention to broaden our cyber-security program and expand into additional markets; our expectations regarding demand for our solutions; our expectations regarding the results from expanded investments in our Business; and our expectations regarding our business and financial outlook, including our guidance for Q2 2016 and full-year 2016.

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

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

Factors that could cause or contribute to such differences are contained in Check Point's earnings release issued on April 20, 2016, 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 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 a reconciliation of such results, as well as the reasons for our presentation of non-GAAP information.

With that, I would 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 joining us on the call today.

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

Revenue for the quarter increased by 9% year over year, while non-GAAP EPS grew 11% to $1.06, exceeding the top end of our guidance.

Before I proceed further into the numbers, let me remind you that our 2016 first-quarter GAAP financial results include stock-based compensation charges, amortization of acquired tangible assets, and acquisitions-related expenses and the related tax effects.

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

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

Our revenues reached $404 million, an increase of 9% compared to the first quarter of 2015.

Total revenues from products and software blades grew by 12% year over year.

This quarter we launched our new data center and high-end appliances, the 15000 and the 23000 families.

The new appliances penetrated very quickly and showed healthy growth.

We continued to experience great success with our software blades, which grew by 19%.

The growth was led by our next-generation threat prevention and next-generation threat extraction packages.

Specifically, we had great success with our advanced threat-prevention blades, including threat emulation blade, Anti-bot, application control, and so on.

During the quarter, and yesterday, we announced the release of Check Point's 1400, 3000, 5000, 15000 and 23000 series appliances.

These new threat-prevention optimized appliances give organization of any size, from small business to the largest data center deployments, the power to run advanced threat-prevention capabilities, such as for inspection of encrypted data without compromising performance.

The new appliances are bundled with next-generation threat-prevention package as a default.

We have seen already the great potential software blade has to enhance customer security, and as a result, increase their renewed subscription the year after.

software blades reached already 22% of our total revenues in the first quarter of 2016.

As you know, according to accounting rules, the fair value of software blade is separated from the appliance price, deferred, and recognized over the service period, typically a year.

As the new bundled package includes more blades than before, the fair value allocated to it is expected to increase and shift between $5 million to $10 million from product revenues to software blades.

Our software update and maintenance revenues reached $193 million, representing 5% growth year over year.

Deferred revenues as of March 31, 2016, reached $883 million, an increase of $111 million, or 14%, over March 31, 2015.

The revenue growth was across all regions during the quarter.

Revenue distribution by geography for the quarter was as follows: 50% of revenues came from the Americas; 35% of revenues came from Europe; and the remaining 15% came from Asia-Pacific, Japan, Middle East and Africa region.

From a deal-size perspective, the number of customers with transactions over $1 million reached to 43 customers this quarter, the same as last year.

Transactions greater than $50,000 accounted for 69% of total orders, similar to 68% in the first quarter of 2015.

The operating margin reached 55%, compared to 58% last year.

Our operating expenses increased as a result of our accelerated investment in sales and marketing, and R&D we started last year.

In 2016, we see, naturally, the full effect of these investments.

GAAP net income for the first quarter of 2016 was $167 million, or $0.95 per diluted share, an increase of 10% from the first quarter of 2015.

Non-GAAP net income for the quarter was $187 million, or $1.06 per diluted share, up from $179 million, or $0.95 per diluted share, in the same period a year ago.

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

Our cash balances reached $3.729 billion at the end of the quarter.

Our cash from operations this quarter continued to be strong and reached $324 million.

We continued implementing our expanded share buyback program during the quarter, and repurchased approximately 3.1 million shares, for a total cost of $247 million.

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

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

We are holding this call from our European Check Point Experience Conference in Nice, France, where we have an all-time record attendance of customers and partners.

During the conference, we've shared our vision and focus.

Customers today deploy large number of point solution for many security vendor, mostly focusing on the detection of attacks.

Unfortunately, detection doesn't solve the problem, and it's very clear that cyber security has to be dealt with differently than with traditional detection methods.

Check Point today delivered an integrated cyber-security platform with a focus on real-time prevention of next-generation threat.

Our cyber-security platform extends from the network and endpoint protection into the data center, cloud and mobile space.

In the future, we intend to grow the number of cyber-security platform and expand into additional markets, like [descending] the evolving market of Internet of Things, critical infrastructure, and national security.

All present significant security challenges and opportunities.

All of these solutions focus on preventing the known and unknown attacks before they can cause damage to the organization.

We began 2016 with some important products supporting this strategy.

We have launched new security appliances that are optimized for threat prevention.

We started with the data center and high-end solution, the 15000 and 23000 series, last quarter; and yesterday, we launched the small- and mid-range appliances, the 1400 series, 3000 and 5000 series.

The new appliances all come with our full threat prevention suite enabled.

Our security management is one of the key differentiators and has been known to be a generation ahead of the market for over 20 years.

We just released R80 and expanded our leadership even further.

R80 management is revolutionary in the marketplace, and enables unified policies for all security functions and to the most sophisticated environment.

While other vendors might talk about prevention, there's a huge gap in the ability to actually prevent the attack and deliver this multi-vector protection.

This is reflected in third-party tests, where Check Point is the only vendor to consistently win the highest level of recognition for our advanced protection.

For example, we've just received our 11th NSS recommended rating, while some competing vendors have failed in many of these tests.

As you heard from Tal, we completed the first quarter with decent financial results.

We are seeing great traction and double-digit growth from our new threat prevention technology that underscores the success of our strategy.

For the second quarter, we are seeing healthy activity, [yet] there are two primary factors that should be taken into account.

First, the introduction of our new products can influence adoption rates and buying fashion.

Second, while we see a healthy buying environment in cyber security, we are slightly cautious in regards to the overall IT industry spending.

We haven't seen big effects on our Business so far, but with our large dependence on an existing install base, any changes in spending can have an impact on anticipated growth rate.

As a result, this can make it hard to predict the future, and there are many additional factors that can lead to outperformance or underperformance that must be taken into consideration.

With that in mind, for the second-quarter financial outlook, we expect revenues in the range of $405 million to $435 million, and non-GAAP EPS in the range of $1.02 to $1.09 per share.

GAAP EPS is expected to be approximately $0.13 [less].

This includes the effect of recent acquisitions.

There is no change in the full-year outlook.

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

Thank you.

At this time, we will be conducting a question-and-answer session.

(Operator Instructions)

Walter Pritchard with Citi.

Hi, thanks.

Tal, I'm wondering if you can talk about, we've seen the annuity revenue growth rates actually decelerate during the period that we've seen your licensed revenue accelerate.

And we've seen your long-term deferred grow faster than your short-term, and I know you offer some multi-year discounts.

I'm just trying to figure out if that might explain the deceleration in some of the annuity lines, namely the blades and the updates in maintenance?

Sure.

So actually, our booking, we don't talk about booking, in general, but I can tell you that booking of Software Blade is very strong and accelerated in the last two quarters.

There is some timing effect, obviously, in Software Blade.

If I recall correctly, last quarter it actually accelerated in the P&L.

Q4, which is typically the higher, so it moved from 19% to 22%, and now it is around 19%, which is quite strong for the first quarter.

So I would say as a whole, when we talk about Software Blade, it's a pretty steady rate of, I would say ever hedging around 20%.

And you can see that as a percentage of our total revenues, it's moved up from, I think it was 20% on average last year and in this quarter it was around 22%.

So Software Blades are a very strong and I can give you some color into the blades in it.

All the blades that relate to advanced threat prevention are doing very well.

We see (inaudible) doing great.

We see threat emulation higher than our internal plans even, they're executing very well, this team, and we think it is a great opportunity when it comes to the new, unknown, known attack packages.

And that is why we decided to bundle some of those blades in the new appliances.

So that is one.

As to the long-term deferred revenues, you are absolutely correct, and that is why I always say the deferred revenues can fluctuate.

Deferred revenues are affected by customer wishes.

Sometimes it can be a few large transactions.

If the customer brings a deal of three, four, sometimes even five years, and it can easily fluctuate the number because it is quite a small portion of our total dollars of deferred revenue.

So it can fluctuate, and yes, it's expected that it can be here before deferred revenues in the long term increase significantly, it can reduce the year after.

Thank you.

Ralph Eyal with Oppenheimer.

Thanks.

Hi, good afternoon.

Good morning, guys.

Quick two questions.

Tal, the Americas this quarter, can you talk about North American versus Latin American performance and how did foreign exchange impact the business?

Sure.

So I can tell you that Latin America was very weak.

It was a negative actually, as expected.

We looked at the currencies, currencies where if you look at the Colombia, Mexico, Brazil, currencies year over year were between 20% to 30% devaluated versus the dollar.

Remember our price list is in dollars, so it affected significantly the buying pattern and also the discount rates in Latin America and as a result, it's pulled the numbers of the total America down.

Got it.

Correct me if I'm wrong, this is probably the first time in a while when you discuss the accounting implications [amplifications] of Blade versus product.

Is it fair to assume that, but for this classification, the actual core growth probably of the product front is higher than the current consensus expectation?

The reason I talked about it is actually, remember the effect in Q1 was smaller because we launched just the 15000 and the 23000 and we just started to transition.

But I say it as a caution measure where we look forward, we launched this quarter just yesterday, the remainder of the family that starts all the way from the small, which is the 1400, all the way to 3000 and 5000 family, on top of the 15000 and the 23000.

So it's across the board from the lowest end to the highest end.

And as we bundle this with the next-generation threat-prevention package, which carries higher dollar value, then it will create the shift between the product recognition, which is immediate in Software Blade that can be deferred and recognized over a year.

So that is why I mentioned it.

I would say it is probably very small effect this quarter, but it can be larger in the next few quarter and that is why I thought it is relevant to put it on the table.

Fair enough.

Thank you.

Rob Owens of Pacific Crest Securities.

Hello?

Sorry about that.

Good morning, guys.

Tal, remind us on the maintenance line, it was down sequentially.

I know that happens often in Q1.

Is this timing of renewals around maintenance contracts?

Or is this a professional services component that doesn't show through relative to how the numbers look?

You're talking about the revenues right?

Yes.

Sure, so [EBITDA] and maintenance naturally affected by the product lines and the renewals.

The renewals are very healthy, but we see some increase in the discount, as we talk about in the previous two quarters.

We talked about the currency, we talked about Europe currency, we talked about Latin America currency, and so on.

As you see pressures that come to pricing, be competitive for currency effect then it affects the growth of the [EBITDA] maintenance line.

Okay great.

And the second for Gil, I know you've had the question for years now about the firewall upgrade cycle replacement cycle.

I think you have seen relatively consistent revenue growth for six quarters of about the same 9%.

If we look at product in Blade, it's been even longer around this 11%, 12%.

So help us understand, are we beyond just that concept of a firewall refresh cycle and seeing just healthy, steady demand in the marketplace?

I think we have a combination of new projects, new customers, and renewal of appliances and renewal of firewall customers, refresh of the equipment with customers.

I don't have any very good statistics or prediction as to the timeline and the expectation.

I think we are very excited about the opportunity, because we've just launched a major product line across the entire product line update, a huge update.

If you remember, the last update -- there has a few things in the middle, but the last update was 2012.

So this is a great opportunity, and I think our new appliances are right on target in terms of their ability to be optimized for the new threat-prevention capabilities.

And I think the main factor for customers to get them is the fact that they actually want to enable more security capabilities.

I think it is a huge opportunity.

I think there is also a challenge.

Some of our market is still thinking traditionally, and they say, I won't adjust the firewall.

In which case, by the way, our new products are also exciting but our old products are also working quite well.

So we are not -- we have a good product for many, many years.

And I think the main opportunity and challenge here is to educate the customers, not just to educate is to really fulfill the need to protect the [guide to the] future threat and really enable all the advanced threat-prevention capabilities and enable them on the equipment.

We are still in a small percentage of [production] there, so there's still a big opportunity for customers to enable them and if they do, I think it's -- first and foremost, it is the security value with customers, yes?

And that is the most important.

From the financial perspective, it is actually quite good, because a lot of the revenue is going to be on the annuity revenue.

All the new threat prevention capabilities, all the Software Blades, which are now a pretty sizable part of our business, approximately 20% from our overall business, invest in annuity business.

So I think we are going in the right direction in terms of moving more and more revenue into annuity business.

Great.

Thank you.

Michael Turits with Raymond James.

Hey Gil and Tal.

So the guide for 2Q is to growth of 6% year over year; you have been doing 9%.

It's the 4% sequentially, that's below your seasonal pattern which is a little bit stronger, around 5% or 6%.

So, why is that?

What's the -- how much of that is from this impact from greater revenue deferral?

And how much of it is from other things, whether it's macro caution or whatever else is going on?

I'll first start with the blades.

So you can see, I gave you the numbers.

I said between 5% to [10]% is moving as a result of the split of the fair value, adding the next-generation threat-prevention to the package.

And I said it is between $5 million to $10 million.

Obviously, I can't know the exact number because A, I don't know what would be the transition from the old product to the new product, and B, I don't know which appliance will the customer opt as a replacement of buying the old versus the new.

So it can create a change in mix of appliances between high-end appliance, middle appliance, and data center appliance, so that's one question mark I cannot predict.

And the second one is ones that will choose it and there will be the effect of the allocation between the appliance, which is a product revenue, and the Software Blade, which is deferred and then recognized into P&L over a year.

And that is basically what that's relating to.

So just to clarify, are you saying there is a $5 million to $10 million impact on next quarter from the change?

Or you're saying it's $5 million to $10 million that's a shift, and then we have to do the math in terms of the deferral on that?

Yes, it's $5 million to $10 million on the products revenue.

Is the potential again.

Is the potential.

What will happen next quarter, we still don't know.

But it can be better, it can be worse.

But the potential based on the current model that she's talking about is between $5 million to $10 million.

Okay.

So that explains a lot of it.

And do you feel like you've built any additional caution in for macro?

Or any other factors relating to this end-user demand?

I don't think that we built any caution of note.

We are taking our financial modeling, we are taking the force of our sales force, and that is what we are delivering to you guys.

That is where it is.

Okay.

Thanks.

John DiFucci with Jefferies.

Thank you.

Tal, I have a question on margins.

We understand that in prior quarters, as the US dollar strengthened relative to other currencies, operating margin experienced a little bit of a tailwind from your non-US dollar operating expenses.

Can you talk a little bit about foreign exchange or foreign currency impact, if any, to operating margins for the first quarter?

And what about the rest of the year, given what is probably going to be a reversal in foreign exchange effects?

You are right.

I would say first the effect on the expenses year over year was pretty minimal.

So we didn't benefit much and we didn't lose much.

That is in the expense side.

I mentioned it on the revenues because Latin America has a big effect on the -- Latin America had a big effect on the revenues right?

Because it affects the whole pattern of acquiring and refreshing or updated maintenance in Latin America, because they suffered the huge effect.

When you look at our expenses, the Israeli shekel didn't move much, but you are right, it can affect the next quarter because they start to have a move toward the end of the quarter.

And when you talk about the euro, again, it was pretty steady average Q1 versus Q1 last year.

But I think it is also got toward the end of the quarter a bit of a move.

So it all depends what the currencies will do when we look at into the next quarter.

So far it looks like the dollar is weakening slightly in the last few weeks, so we will have to see where it will average.

So it sounds like within the guidance, and you didn't -- you actually maintained guidance for the year.

So we should feel pretty confident, at least with rates where they are right now, that's implied.

Even though they have moved since the last time you gave guidance?

Yes, you are right.

Just because they didn't move dramatically.

But if they would have moved 10%, I would have had to check more deeply into that.

Got it, okay, thank you very much.

Gabriela Borges with Goldman Sachs.

Great, good afternoon.

Thank you so much for taking the question.

Gil, my question is a follow-up on the commentary on an uncertain environment for some your security customers.

I know we have talked already a little bit about FX, but if we leave that FX aside for a moment, anecdotally, is there any difference in the conversation that you're having with customers and their intention to spend on security this year?

And has that changed at all over the last quarter?

Thank you.

I think the discussion with customers is actually quite positive.

I think we are -- there is a big universe of security needs there, and I think we are very well positioned to fulfill them.

I think we are active enough and we are finding the right opportunity, there's plenty of opportunities in all the places I spoke about, whether it is critical infrastructure or it is augmenting the existing security infrastructure, everybody in the world speaks about the advanced threat, yet the level of their adoption of technologies that prevents them is still very, very low.

So I think, overall, the discussion in the security space remains quite positive.

But I think, as I said, there are still reasons to be cautious about the overall economy.

Because at the end of the day when an IT buyer says last year I saved X amount of dollars for renewal of my support contract, next year I want to spend less.

Or I want to not spend more and maybe spend less.

And again, we have our big install base and we have the big annuity revenues.

But that can be something that limits us, even though there is plenty of nice opportunities and people are willing to invest in new projects.

That is at least the feeling that I get from speaking to many, many customers.

And maybe just a quick follow-up, if I could.

You mentioned the large install base.

I know adding new customers is also a priority for the Company.

If you could just give us a quick update on the traction you're seeing on the new customer side and what some of the key factors that you think might be driving new customer additions or customers to switch to Check Point this year versus last year.

We are putting a lot of focus on adding new customers, and I think we are starting to see that they are improved.

In this conference here, for example, we see a nice number of new customers, new projects, more than we've seen before, and I think that is as a direct result of our focus on new customers on the new projects.

I think we will do more of that, but it takes a lot of time.

Let's remember, we have a great sales force.

We have -- but they see also a lot of opportunity with the existing install base.

So sometimes it's a little bit, sometimes a little bit challenging to go outside of our comfort zone and approach new customers.

Now when we do, we do have a very nice number of wins with new customers, and we are doing constant surveys and constant checks about the reason for winning and what makes us win.

So I think in most cases, we have been in a competitive situation and we win.

We are seeing that the main reasons for winning, there is two main factors.

One is the quality of our security.

Customers are simply running our products against advanced prep and see that our catch rate is much higher than other products and that we actually block the attacks and not just detect and block it a day later or two days later or months later.

So the level of security is something that we consistently hear from customers is a big differentiator.

The second big differentiator is our security management.

Again, that also repeats on almost every deal.

And we are tracking that, and I think these two factors are the ones that repeat all over.

So I think these are the most important elements and I think we are doing well on them.

I appreciate the perspective.

Thank you.

Sterling Auty with JPMorgan.

Yes, thanks.

Maybe just to follow on a little bit on that line of questioning.

If we look at the heads that you added last year and the investment to go after those new customers, how should we think about the incremental investment that you are targeting this year?

If the environment may be, perhaps, a little more challenging, is the intention to maybe scale back a little bit and drive a little bit more margin?

I think the environment that we are is a good environment yes.

At the same time, it is a very competitive environment, and as we invest in augmenting our sales force and in being and in having more people on the streets, so do our competitors.

So we have no intention to scale that down.

We think the potential is big; we think that we want to invest more, and I think that is the right thing on do.

I think we enjoy very, very healthy margins and what we need to do here is focus about winning new customers, expanding the projects that we are doing and gaining in the long-term future, I think, also gaining market share and accelerating the growth.

And as a follow-up, Gil, in your prepared remarks that you talked about, I think expansion of the security offerings.

You mentioned IOT and a few other areas, but I'm curious if part of that is also some of the products that you are looking to offer.

Is some of the thoughts that you would expand further beyond just the core firewall and blades and perhaps consider some other security technologies?

I think the answer in general yes, we do offer more product, and even today we have mobile product that run on mobile phones We have input products.

And just last quarter, we launched SandBlast Agent, which is basically all the advanced threat-prevention capabilities that we have to the end point.

And we are seeing even more places when we can bring our technology.

Okay, thank you.

Phillip Winslow with Credit Suisse.

Thanks guys for taking my question.

I think it was last year you touched on the robo market, (inaudible) office, your branch office, I guess it was about five quarters ago.

Any update on any traction that you have been seeing there?

And just one quick follow-up question to that.

It's a nice direction to work and I think we've just released last quarter and actually even [this day] new models for our branch office appliances.

And they are also very impressive in terms of their ability to deliver advanced threat prevention.

I think we are seeing good traction; we are seeing nice growth in terms of units and I think also in terms of revenues.

But there's still a small portion of our business and the high-end appliances, even though we are much smaller in quantities, deliver a very nice result financially.

I think, over time, I want to balance that.

I want to see the growth from all product lines and to see a higher contribution from the lower parts of the market.

I do believe that they are very important for the future strategy.

Got it.

And then also from a vertical perspective, anything stand out from a vertical standpoint this quarter versus your expectations in terms of industries or versus anything that you saw last year?

Can't see any big differences.

It is amazing to see when I meet with customers, because usually when you analyze customers segments, you see that for example, financials are a very important [sector].

But the other end, when I meet here with customers and projects, it is from all over, from critical infrastructure, industrial companies, healthcare, local government.

And of course, the same financial organization and big customers that we are used to seeing all the time.

So it is quite fascinating when I meet with customers to learn about their environment and what they are doing.

It is a very wide variety of different types of customers.

I can just say that we saw, like Gil said, in general, it is keeping the same breakdown.

We have seen a nice increase in the technology industry this quarter.

But remember it is small numbers, so it can fluctuate quite easily.

And I can say we see many POCs that have to do with a threat-emulation solution and there are quite a lot of wins in that area.

So I think a product vertical I will say that the threat-emulation solution is doing very well.

Got it.

Thanks guys.

Robert Breza with Wunderlich Securities.

Yes, thanks for taking my question.

Just touching on the geographic environment, I was wondering, Gil, if you could comment if you saw any slow down or push-outs in the last couple weeks of the quarter in Europe?

And if the unfortunate results over there had any effect on the last couple of weeks of the quarter?

Thanks.

Europe was actually our best geography this quarter.

We've seen pretty much all the big countries in Europe deliver very good results, so I think we are pretty happy with Europe performance in the first quarter.

Thank you.

Greg Moskowitz with Cowan and Company.

Thanks very much and good afternoon, guys.

I had a follow-up to Michael's question.

Tal, you helped explain the top-line guidance in Q2 being a function of variability around new versus old appliance demand and product mix.

But you are still forecasting about 4% sequential revenue growth at the midpoint.

Conversely, if I look at the bottom line, your Q2 EPS guidance at the midpoint does not reflect any growth.

And historically, your EPS has grown $0.04 to $0.05 sequentially in the second quarter.

Just wondering if you could speak to the EPS forecast specifically?

Actually, the EPS should make sense.

I think the midpoint is about $0.03 below our [normal] expectation and if you look at the revenues, about $7 million less in revenues equal about $0.03.

So that is the logic, if I'm trying to do it quickly on the phone call.

Having said, so there is nothing dramatic there.

Remember that Q2 always have higher marketing expenses, so typically Q2 margins are lower than the margins of Q1.

As a result of the CPX event that we have across the world.

So there is nothing dramatic there actually.

Okay, thanks, Tal.

And just for Gil, so R80 has a lot of feature improvements.

I know maintenance-paying customers get it for free.

But what do you think this is going to do for Check Point going forward?

By the way, maybe to make sure that you have the right number, the guidance for the EPS was $1.02, the lower end and the high end is $1.09.

So the midpoint is $1.06, which is a growth year over year of 7%, just to make sure we are on the same numbers.

Yes, Tal, I did actually have that, thanks.

I was actually just referring to the sequential growth, which was flattish.

But do appreciate your response on that.

And then Gil, if you had any commentary on R80, that would be great.

I think our management has been a big differentiator for us, especially in winning large deals.

I think with R80, it goes even further, the ability to manage very sophisticated network and the security environment, the ability to get segmentation, compartmentalization, and a lot of features that are designed to make the management of the complex environment much easier.

And actually (inaudible) also apply to the low end of the market, the ability to have one security policy that is unified, that you can see pretty much all the security capabilities presented in one way, I think is appealing to large customers and small customers.

So I think it can be a very important -- will continue to be a very important competitive advantage for us.

I think it also, it can have an impact on -- even though customers do get this annuity, based on her support and maintenance statement, it can have an effect on revenues too, because more and more customers are buying security management from us these days.

And the security appliance management are part of the new purchase, the new products and the refresh cycle.

And we are seeing pretty healthy growth, overall, in the security management appliances.

I think R80 can be a nice opportunity for customers to buy more of these security management appliances.

They see the new features, they see the need, and will buy the integrator hardware software solution to buy it.

Great.

Thank you.

Kenneth Talanian with Evercore.

Hi guys.

Thanks for taking my question.

First one, are your channel partners still offering a pay-as-you-grow leasing model?

And does that have any impact on the deferred revenue?

I think it is offered in some rare cases.

I think I would like to encourage it, actually.

I think we are very open to this kind of business model that will shift more revenue to annuity, and mainly meeting the customer needs.

I think we are relatively healthy on our cash flow, and I think if we can get more long-term growth and more long-term commitment, as opposed to a short-term revenue from customers, that is overall a positive thing for us.

Again, if it is the right thing for customers.

It is not the biggest trend these days.

So in relatively small cases, if you find customers or opportunities that who would like to get the pay-as-you-grow and pay-as-you-go models from us, we'll be very happy to accommodate them.

I would just add, just to -- because maybe what you mean is that we do have transactions that is like an operating list, right.

And therefore, you don't see it in the deferred revenues.

But it we'll get the large order, but we invoice once a month.

And therefore, you don't see the booking in the deferred revenues and you're missing it from the booking.

And on that regard, you're right; there's quite a big bulk of those accumulated deals and a significant amount that was off balance sheet and is still off the balance sheet since the invoice was not invoiced and it's not part of the deferred revenues.

Okay.

Could you frame quantitatively how much that is?

It is quite large, it's high tens of millions of dollars.

Okay.

And then one last question.

You mentioned some progress on the high-end appliances getting off to a great start.

I was wondering, does that reflect your progress with ongoing sales engagements or actual sales of the appliances?

No, this is actual sales of the appliances.

Okay great.

Thanks, guys.

Matt Hedberg with RBC.

Good morning, guys.

Thanks for taking my question.

Gil, with the growth in AWS, and Azure, I'm curious from your perspective, how do you see on-premise network security spending priorities changing in a world where more of this workload moves outside of the four walls of the customer's traditional data center?

I think that's the big strength that we have in Check Point; we know how to secure the traditional network, which is by the way, still very important, still growing, and will be more of that.

And we know how to put our software on the cloud and data center environment.

Our entire [v6] product family, which we are updating and upgrading and augmenting every quarter and every month, I think it is a great solution for that.

That can be a very important differentiator for us.

It is our basis of software.

We can run it on almost every environment, and I think we are building everything that's needed for the cloud environment, like automation of the provisioning of the new network, the new security.

With traditional networks, you put a box, you do it a lot, all the process manually, and it takes time.

In the virtual world, people want to make automated processes so when they do create a new virtual environment, they automatically get the security with it.

And automatically it is being added to their policy and all the connections are being made.

So I think we are very, very strong in that, and we have a huge competitive advantage on that side.

As I said, because everything we are doing software and it's not dependent on specific hardware customization, it's much easier for us to bring it to a new environment and I think it all ties at the end to our management that can manage all these environments from one single console.

So overall, we are seeing nice level of interest that.

Still the revenues are relatively small.

But in terms of how do we feel about the interest level and their position that we have in that marketplace, I think we are -- we believe that we are positioned very, very well into that future.

And if that market ever becomes significant in terms of dollars, I think we are there to serve it.

That is very helpful.

Maybe just a quick one for Tal.

You called out the strength in North America and Europe.

Asia-Pac looked a little slower versus historic trends.

Was there any country in Asia-Pac that was weak this quarter?

No, actually, no.

Remember you are looking at the revenues, so Q1 can shift easily by revenue recognition accounting rules.

So I will say Asia actually had a very nice quarter.

They had strong Japan, strong India, strong Singapore, strong China.

It was quite a nice quarter in Asia.

Great.

Thanks, guys.

Erik Suppiger with JMP.

Yes, thank you for taking the question.

First off, just in the US, can you talk about linearity at all?

There were certainly concerns at the beginning of the quarter about the macro environment.

Secondly, as you look at your threat-prevention opportunity how many of your existing customers already have a third-party threat-prevention solution?

And do you position yours as a replacement to those existing solutions that are deployed?

We probably have both.

Maybe I will start with -- actually I forgot the beginning of the question.

But relating to threat emulation, I will say we see both.

We see us bidding head to head with the players in the threat prevention and winning very nice transactions.

As Gil says, if you look at the NSS report, our catch rate is by far the best there.

So when the customer is serious in doing a POC, we can show our significant leadership in that area.

And we saw a very nice wins, both with large and mid-sized organizations.

In terms of the penetration to the install base, it is very small right now.

Because if you recall, the whole threat prevention just started -- or at least advanced threat prevention and threat emulation just started in the last few years.

So still it is a greenfield; the majority of the customers don't have a solution.

And in some places with new customers, if you go to the higher level of customers, you see customers already have a solution and replace them, because it is more convenient and managed in a centralized way and a much higher catch rate.

When you talk about the linearity, I would say no, it is Q1.

So I don't think we saw anything dramatically change.

I think the first one was slightly stronger and then the second weaker and then the third stronger.

So I think -- but again, it is Q1, so it's small numbers.

So I wouldn't conclude anything out of that.

Very good.

Thank you.

Gray Powell with Wells Fargo Securities.

Good morning, thanks for taking the question.

I just wanted to follow-up on the shift from product revenue to blades, which goes into deferred.

And make sure that I understand that correctly.

So the bundling of advanced threat blades is going to have a $5 million to $10 million impact on Q2 product revenue.

How does that impact full-year 2016 guidance where revenue targets were unchanged?

So you can see if you take every quarter, you take the $5 million to $10 million more and put it in deferred revenues, then recognize it.

And obviously, Q1, majority of it already will go into the revenues in 2016.

In Q2, you'll have about 2-1/2 quarters and Q3 products will have about 1-1/2 quarters.

In Q4, we'll have only 1/2.

So that is the effect.

It is probably accumulated.

If you do the numbers, it can have an effect of, I don't know probably around $20 million.

I didn't do actually the accumulated number.

We are just starting with that model, so it's too premature to say right now how it will shape up and so on.

Long term, I think at the end of the day, we will recognize [all these] revenues.

And even more important than that, I think it creates a very nice opportunity for renewal of that revenue in the next year.

So the overall lifetime value is bigger than the amount that we are deferring.

We are not shrinking anything in the revenue line; we are just -- I think we are growing and deferring that.

Okay that's helpful.

Thank you for the color.

Brent Thill with UBS.

Good morning, Gil and Tal.

This is Fatima on for Brent.

Thanks for taking the questions.

You are now seven years into your Blade strategy.

Historically, you have said a majority of your base still doesn't have most of your blades.

So I'm wondering if you can refresh us and remind us on what the current levels of penetration are?

And what really needs to happen to get through the 50% mark of adoption?

And then a follow-up, if I could.

First, I think the Blade strategy has been very successful for us.

We've built a business from a very low amount of revenue in the [threat] technology area to now a business with around 20% of our revenues that's running at a run rate of at least $400 million a year.

So that is pretty significant if you look at how many businesses in product threat prevention and threat prevention technologies have been built the last few years to that level of $400 million, I think we are doing very, very well.

All of that is new business, new technologies and annuities, so I'm very happy with that.

If you look at the penetration rate, that really varies.

When we started with it seven years ago, the main Blade was IPS.

IPS today is I think at approximately 50% of our install rate.

I'm not sure if I have the correct data, but -- and if I'm wrong, we'll let -- might correct it, but I think we are at the 50% of customers are adopting that.

If I look at threat emulation, which is about two years into the market, we are still at the single-digit percent of penetration to customers, which is, by the way, quite nice.

We are already at thousands of customers that are using threat emulation, and we this is nice numbers compared to the industry, but still very small compared to the hundreds of thousands of gateways that we can [round on] and to the tens of thousands of customers that we have.

So I think overall, I'm very happy with the strategy.

And I think the nice thing about this strategy is it evolves.

Every year, we bring new blades to the marketplace, and we are -- there's an additional opportunity for growing with these blades.

That is really helpful.

Just to switch gears into the announcement you made about the release of some of the lower-end SKUs for the branch office and remote offices.

Can you help us think better about how you view the SNB, or the lower mid-market appliance opportunity versus what we might intuitively think that this market would maybe gravitate toward the managed security service provider solutions?

Why would they opt for an appliance when they could theoretically outsource it?

Just would love to hear your thoughts on that.

That's it for me.

Thank you.

That is a very interesting field.

First I would differentiate between two appliance series that we have that are similar in many aspects but different in others.

We have the 700 series, which is new, and that is the small business appliances.

And we have the 1400, which is the branch office appliances.

It's similar to the 700, but it has enterprise management capability.

If I do look at the 700 series, which I think is more where you were -- the 1400 are designed so a big enterprise that may have, I don't know, 1,000 branches, it's a bank or it's a retail chain, small shops, or anything like that can easily use the same security, the same quality, the same management, and scale it to a large number.

We have a very easy set-up, but with the same centralized control, same centralized management.

The 700 series is more focused about small businesses that wants to manage it on her own.

Do not want the sophistication and the complexity of the full Check Point's smart center, R80 management.

So we have a very simple Web-user interface that they can do the security management capabilities.

And that product, by the way, you can see the reviews it got on the previous release.

It is way, way ahead of the market in terms of the completeness of the product set and mainly the ease of use.

So you can get really, really sophisticated security features, very easy to use.

It is not against managed services, because actually these products fit very well into a managed services environment.

And big numbers of them do operate in the place where there is a managed service provider who provides the service, the updates, the upgrades.

And the user can still do the basic configuration, changes of the parameters that they want and so on.

So it actually is designed and works very well in the managed environment.

And we have tens of thousands of these devices managed.

So both of them present different opportunities, and I think in both of them, we have a nice opportunity in the marketplace.

And I think it fits very well to the direction of the market.

At this time, I would turn the floor back to management for closing remarks.

Thank you all for joining us today.

We appreciate your participation.

We'll be taking calls a little later today, and I'll be taking even more calls later in the week.

Thanks a lot, and have a great day.

Bye bye.

This concludes today's teleconference, thank you for your participation and you may now disconnect your lines at this time.