Check Point Software Technologies Ltd (CHKP) 2016 Q2 法說會逐字稿

Greetings, and welcome to the Check Point Software Technologies second quarter 2016 financial results conference call.

At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you, Mr. Meintzer, you may begin.

Thank you, Doug.

I would like to thank all of you for joining us today to discuss Check Point's 2016 second quarter financial results.

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

As a reminder, this call is 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 August 2. If you'd like to reach us after the call, please contact Investor Relations by email at kip@checkpoint.com, or by phone at +1 650-628-2040.

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

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

These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 include, but are not limited to, statements related to Check Point's expectations regarding business, financial performance, customers and products, including its expectations for product introductions and enhancements, our expectations regarding the introduction of new products and programs and the success of those products and programs, our expectations regarding the impact of accounting rules applicable to our bundled solutions, our expectations regarding demand for our solutions, our expectations regarding pricing and discounting, our expectations regarding financial income from investments in Q3, and our expectations regarding our business and financial outlook, including our guidance for Q3 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 press release issued on July 26, 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, 2015, 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 a reconciliation of such results, as well as the reasons for our presentation of non-GAAP information.

Now I would like to turn the call over to Tal Payne for a review of our financial results.

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 second quarter.

Revenues for the quarter increased by 7% year-over-year while non-GAAP EPS grew 10% to $1.09, at the top of our guidance.

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

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

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

Our revenues reached $423 million, an increase of 7% compared to the second quarter of 2015.

Product and Software Blades revenue grew this quarter 10% over the same quarter last year, reaching $229 million.

This quarter, we completed the launch of our new appliance family with the introduction of the small to midsized appliances.

The market adoption was strong and we see very good transition of over 50% of our new appliances, as sold from the new family.

Number of core gateways sold increased in double-digits, both in units and in dollar value.

As we discussed in the previous call, the new appliances are bundled with the richer Software Blade package.

Naturally, the new package carries a higher value.

According to accounting rules, the value of the Software Blade is separated from the appliance price, deferred and recognized over the service period.

The increasing value of the bundled Software Blade was about $8 million this quarter.

This amount shifted from product revenues to our deferred revenues and recognized over 12 months.

The net effect on revenues this quarter was approximately $6 million.

Annually, we expect net revenue in the amount of $32 million to $40 million to shift to our deferred revenues.

Our Software Blade revenues growth accelerated to 21% from 19% in the previous quarter.

This is a result of the success of our NGTX package which includes our advanced protection against zero-day attacks with Threat Extraction and SandBlast Threat Emulation Cloud Services.

This is one of our focus areas so we're very pleased with our success here.

Softer Blade accounted for 22% of our total revenues this quarter.

Our software update and maintenance revenue reached $194 million representing 4% growth year-over-year.

Deferred revenues as of June 30, 2016, reached $892 million, an increase of $112 million or 14% over June 30, 2015.

While we see successful product penetration of our core appliances and the new technologies, as well as the growth in our installed base, we continue to see increased discounts.

Revenue growth during the quarter was across all regions.

Revenue distribution by geographies for the quarter was as follows; 49% of revenues came from the Americas, 36% of the 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 was 63 customers this quarter, the same as last year.

Transactions greater than $50,000 accounted for 72% of total order value, similar to the second quarter of 2015.

GAAP net income for the second quarter of 2016 was $166 million, or $0.95 per diluted share.

Non-GAAP net income for the quarter was $190 million, or $1.09 per diluted share, up from $183 million or $0.99 last year.

Non-GAAP earnings per share grew by 10% and came at the top of our guidance.

Our cash balances reached $3.708 billion at the end of the quarter.

Our cash from operations this quarter continued to be strong and reached $202 million.

This quarter our financial income came at $12 million, that includes $2 million gained from the exercise of an investment.

The income for the next quarter is expected to be at the normal levels.

This quarter we had announced an extension of our buyback plan to repurchase up to $250 million a quarter up to an aggregated amount of $1.5 billion.

We started implementing the extension of the plan during the quarter and repurchased approximately 2.9 million shares for a total cost of $246 million.

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

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

We had a very active first half of the year and completed the second quarter with healthy financial results.

During the first six months of 2016, we refreshed our core product line and launched our new series of appliances designed to provide advanced threat prevention capabilities to customers of all sizes.

The new appliances include the 1400 and the 3000 Series for small and branch offices, the 5000 Series for midsized enterprise, the 15000 for the enterprise, and the 23000 for the high end and data center.

During the quarter, the number of appliances sold increased by double-digit with the majority of growth in units coming from the new lines.

It appears customers are very happy with the latest appliances and we see the transition moving faster than we expected.

Over 50% of the appliances sold during the quarter came from the new families.

We also continue to extend our industry leadership with the launch of R80, our latest Security Management platform, enabling customers to manage the most sophisticated the security environments while providing them the ability to consolidate many security functions and operations into a unified and scalable management platform.

To quote one of our new customers, Check Point R80 is fantastic.

Its innovation is greatly forward because they show us what is actually going on in the environment through a single pane of glass.

Our main focus this year continues to be at the two forefronts of cyber security, preventing zero-day attacks where our SandBlast technology is featured, and mobility where we have one of the only products to address the challenge.

In both of the above areas we have made significant progress in the second quarter.

We launched our first software as a service security solution, SandBlast Cloud for Opus 365.

With this solution, we are extending the most sophisticated attack prevention technologies to the cloud.

This complements our infrastructure as a service cloud solution we have (inaudible) [VSAT] offering.

Overall, we have seen very healthy growth of our subscription revenues driven by the increased adoption of SandBlast by customers of all sizes and all over the world.

If you look at the mobility, we have also experienced great traction in the second quarter.

The revenue contribution is still small, but in the second quarter we have seen significant growth.

Some customers think that mobile threats are unsubstantial yet our research shows otherwise.

Real world risks of mobile security are greater than many believe.

Several research results published by our research team and value operation of two mobile malware families targeting primarily Android devices, code named Viking Horde and HummingBad.

The second is more than 10 million devices infected and hundreds of apps that were used to deliver malware.

This shows us that mobile malware risks are not just theoretical, they are being exploited at large scale every day.

From a business perspective, we continue to increase our focus on winning new projects and new customers while preserving and enlarging our existing accounts.

Overall, I believe that we have made good progress here.

We continue to win new and impressive logos and we have added many new customers.

While our focus for the field is to win new projects and new customers, we also want to ensure that we take good care of our installed base.

This can result in an increased discount in maintenance.

Geographically, we have seen very healthy business activity and growth in Europe and Asia.

In the US, our pipeline continues to expand, though it is hard to compare this quarter's business results to last year as we have an exceptional second quarter of 2015 in the US where we won a couple of giant long-term contracts.

While our overall business results are quite positive we continue to balance between future growth and investment while taking care of our existing customers and delivering healthy financial results.

As for our projections for the remainder of the year, we continue with similar assumptions and we are pleased with the adoption of the new products in the first half of the year.

However, our business model is slightly shifting as the result of our success with the new appliances that include additional options for bundled Software Blade.

With these new offerings, more revenues are being recognized as subscription revenues and less as product revenues.

The subscription is recognized over a period of a year with the potential for future renewal growth creating long-term revenue stream, while the product revenue appears immediately on the quarterly results.

This will lower revenues by approximately $8 million to $10 million on the third quarter and double than that for the fourth quarter, which also means an effect of approximately $0.03 and $0.06 to Q3 and Q4 earnings per share, respectively.

Which brings me to the financial outlook.

As I've said many times, there are many factors that can lead to different results and it is always hard to predict the future.

Our pipeline for the third and fourth quarter is quite healthy, and I would like to provide our expectation for the third quarter taking into account the revenue model transition into an increased subscription model.

For the third quarter, we expect revenues in the range of $405 million to $435 million, and non-GAAP earnings per share in the range up $1.03 to $1.10 per share.

GAAP EPS is expected to be approximately $0.13 less.

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.

(Operator Instructions)

Gregg Moskowitz with Cowen and Company.

Okay, thank you very much.

Good afternoon, Gil and Tal, thanks for the color, as well, by the way with respect to the impact from the new appliance family, that is helpful.

I wanted to ask, to start off, on Brexit, naturally you price in US dollars and following Brexit, it now costs customers in the UK quite bit more to buy Check Point products than it use to.

Did that have any discernible impact on you in Q2 or has there been any effect so far in Q3?

I didn't see much impact in Q2 and I do not know how to evaluate the impact for the third quarter.

Again, it had some upside but it also had some risks in it because economical changes also create instability, but so far there is nothing of that, I think we are concerned or modeling into our future.

Yes, I can think Q2, but it was towards the end of Q2 that it happened.

We had pretty good results in UK, and in general Europe was very strong.

Okay, great.

And, Gil, in terms of R80, is it having any effect in the marketplace do you think at this point or is it too early in your view?

I think it is too early overall.

R80 is not expected have any financial contribution because it is part of our product and it is in the upgrade path for existing customers.

I think it generates more differentiation, I think customers -- at the initial (inaudible) which we get is very positive.

I read one quote but the quote actually represents what many customers are saying.

So I think overall customers love this and customers see that it is a very important differentiation for the Check Point strength in the Check Point product line.

Great.

And one last one, if I could, Gil, you mentioned the launch of your first security SaaS solution with SandBlast Cloud, protecting Office 365, does that imply that we will see more SaaS security offerings from Check Point going forward?

Probably, yes.

Probably not the last, yes.

Terrific, thanks very much.

Shaul Eyal from Oppenheimer.

Thank you.

Hi, good afternoon, guys.

Two questions on my end.

Gil, in your prepared remarks, you indicated the recently introduced appliances being embraced by customers resulting in a marked increase in unit sales.

Can you provide us with more color on what you mean by marked increase?

And also the success you are seeing in that respect, is it driven by greenfield opportunities or displacements?

And I have a follow up.

I think we announced some of the appliances in the first quarter and some in the second quarter.

The appliances that we announced in the first quarter are already, I think the transition is already 80% to 90% of them.

And the appliances we released in the second quarter, there have been some sales of the older appliances, so it is about, I would say, about 50% of the appliances on this one.

So overall I think very healthy acceptance.

We have also seen a nice increase in unit sales and in dollar sales of the new appliances.

So I think overall there is a good acceptance.

Is it new customers or existing customers?

I think it is both.

Most of our sales is to existing customers, but, again, we have a very good examples of new customers that we won that like our security architecture.

Got it.

And probably relating to Gregg's second question, you guys offer right now your vSEC virtual security solution on Amazon's Web services marketplace.

I noticed probably a tiny fraction of revenues, but can you talk to us about how you currently see your relations with Amazon and how do you envision AWS impact on the security arena in the coming years?

I think, first, we are not limited to others.

One the strengths of our security architecture and especially of the vSEC family that you get the same level of virtualization wherever you run on the private cloud, with environments like VMware, wherever you run on the public cloud, with Azure and with Amazon and I think you get the single architecture that covers all the bases and the entire infrastructure of the company.

We do have a good relationship with some of the large providers and many of them refer business to us and we are part of some of the marketplaces that they offer.

And I think we have seen several hundred installations and successes in all of these types of environments.

So it is starting to take traction.

Again, as you said, it is still a tiny fraction of revenues, but I think one of the strengths of what we have in Check Point is the software architecture that can bring the management and the software architecture to all types of environments.

Thank you.

Walter Pritchard from Citi.

Hi, thanks.

Tal, I'm wondering if you could just clarify on the impact to guidance for the third and fourth quarter?

Is that incremental to what you talked about on the last call, or is that the cumulative impact of the shift to ratable on the business?

It is actually relating in total, meaning in Q3 Gil said it is between $8 million to $10 million effect on the revenues, so the revenues would be reduced in $8 million to $10 million.

The range that we provided was $405 million to $435 million, so that is, obviously, included in it.

And on the EPS we said $0.03 and our range was $1.03 to $1.10.

And then we said on Q4 it is going to be approximately double that amount, which means $16 million to $20 million effect on the revenue, and $0.06 effect on the EPS.

That makes sense, Tal.

And then, Gil, on the comment around discounting, you made a follow-up comment to what Tal mentioned in her script.

Could you just clarify why you think you are seeing more need to discount at this point?

First, the discounting is not all over.

The discounting is focused in certain areas.

We do see a little bit more discounting on maintenance contracts, and I think it is driven partly by competition, partly by the fact that customers in general and the overall IT environment is suffering from some issues and customers would like to maintain or reduce their ongoing budget.

I think part of this is our conscious decision to keep every customer, to maintain the customer base, and to focus our energy on winning new projects and new customers.

I think we have seen some pressure on the maintenance revenues.

We are keeping, by the way, very high percentage of customers.

Our renewal rates are very good, so I think it points to a lot of strength that we have, and I'm just pointing that out because it is something that we have seen.

Great.

Thank you for the candor.

Michael Turits from Raymond James Financial.

Hey, guys.

I might have missed it, but did you give the impact of the change in accounting on the Q2 results?

Sorry if I missed it.

Yes, I said net approximately $6 million.

The net revenue effect.

Okay, so turned amount was more deferred and then -- I assume those numbers of $8 million that you gave for the third and fourth quarters, those are net numbers also, right?

Yes, correct.

And then on the new appliance line, I know you said that it had driven an increase, driving double-digit growth in -- what has been the impact on ASPs, and has it had a neutral effect on revenue growth or positive or negative?

I think overall it has a positive effect on revenue growth in the core product line.

In the core product lines we actually had a pretty good quarter and we have seen great success.

We did have had some shifts from one product family to another.

There are product families that have grown on the account of some other product families, but overall I think we had a very, very good transition, much better than we had in the past.

Again, it is too early to say because it is only a quarter or a quarter and half into it, but the beginning looks like it was made in a clean way.

Michael, I said that the core, it grew both in dollars and in units in double digits.

Now ASP slightly pulled down because increasing units usually comes from the mid-range, right, but the average ASP moved down but the total dollars actually also increased in the core appliances in double digits.

Great, thank you.

John DiFucci from Jefferies.

Thank you.

Tal and Gil, I know you don't guide cash flow and deferred revenue, but to give us some confidence from the impact to the guidance from the shift to more subscription, can you even subjectively give us some commentary around the impact to cash flow and billings over the next couple of quarters?

That is actually -- the transition from product to subscription should have no effect on the cash flow in general, right?

Because the booking amount is the total amount, it is just an accounting split between the subscription and the product.

Okay.

What about the total billings then?

It should be the same?

First of all (inaudible) but also the new appliances do not have an effect on that because we sell the appliances for the same amount except that the revenue recognition is different.

And, again, I think the most important element is not the revenue recognition, the most important element is that it creates a lot of upside opportunity for the future because we shift more revenues into annuity.

And our historical results are showing that a lot of customers are renewing the subscription, and, by the way, with the new appliances not all bundled options are mandatory, some of them are optional.

So we can expect that the customers that purchased a certain package, purchased it because they intend to renew it and they really want it, so it is not just a reclassification in many cases.

So overall, I think we are very pleased with that change.

Again, in percentage-wise it is not huge.

Let's not take it out of proportion, but still I think that the amount of dollars that we stated per quarter is still important to note.

Yes, I understand, but I'm just trying to get to -- I would assume it is going to have a positive impact on deferred relative to what it would have been otherwise.

So your total billings would be about the same?

Is that an accurate assessment?

Accurate assessment completely.

The change in the split should not have an effect on the booking.

Got it, very good.

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

You guys have a ton of cash on the balance sheet, $3.7 billion of cash and marketable securities, it is good to see you increasing your share repurchase, but any thoughts on the M&A environment, or even dividend?

I know you shied away from that in the past, but any thoughts today?

First, we're looking at both options all the time, and I think we are looking very actively in various acquisition options, large, small, expansion, not expansion, and the reality is it is very hard to find things that really fit our architecture, and I think we are very, very focused to deliver a very clean architecture that fits the customer needs and not try to become a supermarket for all types of (inaudible.) But I think we're definitely active in the M&A space.

On the dividend front, we are looking at that and we are referring to the shareholders a bit.

I think we are regularly conducting informal surveys amongst shareholders.

Right now the majority of [you guide] shareholders do not want dividend, and personally, by the way, I am not against it.

But I think the vast majority of shareholders still would prefer buyback and only buyback over dividend.

Great, thanks for the detail.

Shebly Seyrafi from FBN Securities.

Yes, thank you very much.

So I just want to be clear, you had an annual guidance for revenue of $1.720 billion, to $1.790 billion in the past.

Is that adjusted downward by the $8 million to $10 million in Q3 and double that in Q4?

Theoretically, yes.

Remember that it is basically moving to the lower part of the range, but remember we already have Q1 and Q2 behind us, so some of that range shrunk anyway, and that is why we gave you the effect on Q3 and we gave you the effect on Q4, so you can calculate it yourself.

Okay.

And the other question I have is that your sales and marketing expenses have been growing at mid-teens or higher growth rates for several quarters, 16% last quarter, for example.

How long should we expect sales and marketing to remain elevated?

I think we would like the sales and marketing to be even higher.

What we would like also the business result to be higher.

I think we made a big investment last year and we're continuing the investment this year, not at the same pace as we have done last year, and I think I'm looking forward to seeing more of the results of the investments that we made last year.

Thank you.

Karl Keirstead from Deutsche Bank.

Thank you.

I've got a similar question to the last one, just on the earnings.

So your full-year earnings guide on the prior call was $4.45 to $4.60.

Could you just clarify what you are revising it to?

Am I understanding that you are moving it down by $0.09, $0.03 in 3Q, and $0.06 in 4Q?

And then, secondly, to the extent that you are adjusting the guidance top and bottom perhaps to the lower end of the prior range, is this entirely because of the transition from product to subscription, or are other things weighing on that guidance, as well?

Thank you.

Again, we didn't give the full year, but your assumption is the right assumption, meaning, we expect Q3 and Q4, we basically said Q3 effect of the subscription is about $8 million to $10 million and the EPS is $0.03.

And if you look at Q4 it is between $16 million to $20 million and $0.06 on the EPS, so you can take the number that are out there right now and you can pretty much see what we are thinking at this point in time.

Please bear in mind that this is an estimate because the transition rate, the customers decide it is not us.

If you remember last quarter, I said I expect the effect in Q2 would be between $5 million to $10 million.

It has ended up to be $8 million on the product and $6 million net on the revenue.

So it is very hard to calculate because there are many things out there relating to the mix of the products, which customer product, which product the customer chooses and each appliance has a different bundled proportion.

And that's why I'm just putting it out there to know that it is not an exact number, it is the best estimate that we can do based on what we see so far.

That is not dollars that are lost, that is dollars that are moving to the deferred revenue, so that is one comment.

And the second, the other things that are affected, there are always other things because you are talking about guidance and forecasts.

We discussed about the updated maintenance price pressure that you can see, we talked about it last quarter, we're talking about it this quarter.

So that can have some effect, as well.

Okay, thank you very much.

Fred Grieb from Nomura Securities.

Hey, thanks.

Two for me, first up, so we have seen several acquisitions recently in the security space, and a few more being telegraphed.

I am just wondering, has there been any change to your M&A strategy?

Are you potentially going to get more aggressive in terms of pricing, or is it just exact same strategy but there are more sellers who are willing to sell at this point?

I think the M&A, the large ones that we've seen in our industry are less related to us.

I'm not sure that I fully understand their logic, but I think that they are very complementary and very cooperative to what we are doing within the companies that we are in very good relationship with.

As to what it will do moving forward I do not know.

Again, we're looking for the right technologies that can complement our product line and let us provide the customers with more consolidating and better architected solutions and when we find these, large or small, we will act upon it.

Got it.

And then, second question, if I pro forma your Q3 guidance for about $9 million in additional ratable revenue recognition and I pro forma Q2 for about $6 million, I am getting to a flat sequential guide, which is a bit lower than you have guided for Q3 in the last two years.

I'm wondering if maybe that is partially due to the last two years have been a very strong security selling environment and we seeing that weaken a bit, or if there is any other change there, if you could comment on that?

Again, I think it is the same question as the previous one.

We take into account the reduction is the result of the move or shift from the product to the deferred revenue, that is an effect of between $8 million to $10 million.

Typically, Q2 and Q3 are very similar, and on the subscription, the effect of the discounts.

And you have a range, right, the range is $405 million to $435 million, so it depends on the end results of the booking.

It's also, without being too bullish on the market, again, it is hard for me to predict about the overall market conditions and so on, and I'm sure it is many risks in it but at least in our pipeline, our pipeline is quite healthy for the fourth quarter.

So from my people I don't see any slow down.

Got it.

Thanks a lot.

Ken Talanian from Evercore.

Hi, guys.

Thanks for taking my question.

So first one, you discussed this a bit earlier, you mentioned that there could be an increase in the maintenance discounting for the installed base.

I was just curious, how does that compare to the 2012 period where the revenue base was perhaps a bit slower growing than today?

Can you repeat it, please?

I was wondering how your level of discounting on maintenance compares to the 2012 period?

That is a bit too back, I don't really have the numbers from 2012, right.

I do not know why you compare it to 2012, but I can say definitely the increase, there is over the past few years, we see a slight increase over time in the discount rate.

Okay, okay.

And then for my follow-up I was curious, you mentioned there is about $16 million to $20 million for 4Q transitioning to ratable revenue.

Should we think about that as a run rate for the quarters into 2017 or is that substantially higher because it is 4Q and you tend to have more revenue come through in 4Q?

Q4 is much higher because Q4 is typically a significantly larger quarter definitely versus Q2.

Now remember there are two factors here.

One is that the booking of the product in Q4 is by far the highest, and also the transition rate that I expect in the second half of the is much more than I had in the first half of the year.

Okay, great.

Thanks very much.

Sterling Auty from JPMorgan Chase.

Thanks.

Hi, guys.

Just wondering, on the impact of the shift to deferred revenue from the bundling, I thought I heard you say that would get recognized over 12 month so it should be a benefit to short-term deferred revenue.

Now normally the short-term deferred does decline quarter-over-quarter in June, but I would have thought with the impact, the increased impact of the bundle and the shift that we would have seen less of a decline, but it seems like the decline in short-term deferred revenue this year was a little bit more.

Is that just from the discounting or is there anything else to read into it?

Just from the discounting, but bear in mind, in Q2 the deferred revenues enjoyed very little because we just started with the transition, so it has probably enjoyed in total about $6 million.

Towards the end of the year, most of the amount we're talking about is actually going to be in the deferred revenues so it would be a bigger effect.

And then in your prepared remarks, I think, Gil, you mentioned that the appliance sales, the new appliance sales were up double-digits in units and revenue.

Maybe I am just semantics, but I just want to make sure, in the quarter were you only selling the new appliances or were total appliance sales up double-digits in units and dollars?

The core.

All of them together, if you take all of the core appliances, which means all the appliances from below 2000 all the way up to 21000 and all the new appliances, which means the 3000 all the way up to 23000, all of them together increased in double-digits.

There are a few appliances that are not part of our core.

Management and [everything], the super high end and the third-party appliances that we do, these are not the majority of the appliances but we do not count them in the core.

That's very helpful.

Thank you.

Rob Owens from Pacific Crest Securities.

Great, thank you very much.

Was there any FX impact to OpEx this quarter, either positive or negative?

Not material, it was actually very similar to Q2 last year.

Great, thanks, Tal.

And then, second, just dovetailing Sterling's question a little bit about that $6 million, because I thought it would have showed up more so in short-term deferred, is the proper way to look at the health of the business, given this transition, more of a short-term billings metric now where we look at the change in short-term deferred revenue, as well as the revenue, which shows about 6% growth here in the quarter?

Can you repeat the question?

Yes, given the changes that you are seeing with the move to subscription right now, should we be more so looking at a short-term type of billings metric where the revenue plus the change in short-term deferred relative to how this transition is playing out in that I think that is about 6% growth year-over-year growth here.

All we're saying, no, I only said don't look only in one metric because one metric can be confusing, so you need to connect the data, that is why we are here to help.

The deferred revenue is a good indicator, short one, of course, long term can shift very easily.

But bear in mind that it can be moved depending on the booking timing.

So it is one indicator, but it is not the be-all and end-all, that's one.

You definitely can see the deferred with the Software Blade increased and that maintenance had pressures from the discount, that's one.

When you look at the P&L, I always recommend, when you look at the revenues, look at the products together with the subscription because product and subscription all of them are our product.

Subscription is product that is sold as a subscription, and products are the ones that sold as license.

But in reality, unlike in the accounting, many times they are not separated.

It is one appliance being split and I would recommend to look at the total number of product and subscription together, that is why we have product, subscription and the total of both lines.

So I would recommend you look at both.

Great.

And, lastly, was there any change in contract duration in the second quarter, or was it relatively consistent with multi-year support deals versus one year?

I think update and maintenance was pretty much similar.

But I think one thing you need to be careful with, most of our business is one year, the deals that we have that are multi-year are usually very large unpredictable deals.

So the fluctuation in our long-term deferred revenues are bigger than the short-term ones.

Great.

Thank you, guys.

Jonathan Ho from William Blair.

Good morning.

Can you talk a little bit about the competitive environment, and have you seen any changes or shifts in competitor behavior over the course of the quarter?

I think generally the environment remains competitive and we kind of see the same thing.

There are certain areas, like with our SandBlast product and the sandbox technology that I think we have significant competitive wins in this placement.

There are competitors that we see, the more these vendors become larger, the more they have installed base and the more we displace them.

But overall, I think the environment has been competitive and remains competitive in a similar way.

Got it.

And can you talk a little bit about, from a geographic perspective, how you see your pipeline coming about?

Is there any unusual activity in either EMEA or the APAC region or the Americas that you would note?

No, I think we've seen consistent investment and consistent growth in most areas.

As I mentioned, in the second quarter we had very good results in Europe and in Asia.

The pipeline for the third and fourth quarter looks equally positive in all regions.

Great, thank you.

Gabriela Borges from Goldman Sachs.

Good morning.

Thank you for taking my question.

I wanted to follow up on the discussion on the transition rate between the older generation appliances and the newer generation appliances.

Gil, I think you mentioned that the transition was going faster than expected, or better than it had gone in the past.

Maybe just a little more detail on how you typically expect these types of transitions to go, the over 50% uptick that you are seeing in your appliances?

I'm just curious if you ever see customers waiting for new products to be released before they do their upgrade cycles?

Thank you.

I think we're positive about the transition.

I think in the second half of the year the majority of appliances will be from the new series and the new appliances and now that we completed releasing all the products I think everything is out.

Whether customers were waiting or not for the new appliances, I do not know.

We are trying to be a relatively -- it is not like we have an annual uptick cycle that a customer can wait for in the hardware.

A big shift like that happened only like four years ago, so it is not something that happens every time, and I do not know if customers were waiting or not.

It is a very good question.

I think what we do see in our customer base in general, and that is why we were actually pleased from the transition, that many times customers are quite conservative and like to see the equipment we've already certified and that they are used to, and here we are seeing a faster shift towards the new appliances which is a very good sign.

That's helpful, thank you.

And as a follow-up, if I could, Tal, we talked about the revenue recognition impacts from the transition, just curious as we look out to the model impacts for next year, do you think we should expect to see a positive tailwind to the software subscription business as you see some of this bundle business come up for renewal?

Thank you.

There can be two effects here.

We saw it in the previous transaction.

A, you are absolutely right.

All the ones that are bundled this year, because that portion has increased, I'm hoping to see them renewing next year.

On the bundle, we typically, if you remember, when we launched the previous one, we talked about 30% or so that are renewing, this is a bundle, so it is a very high conversion rate.

I hope it will stay the same and there can be a nice generation of Software Blades for next year.

So it continues the growth of this very important revenue stream.

So that is one.

When it comes to the product revenues, just the product, then it is over time getting easier and easier, obviously, because right now we are getting a hit on the product line but this is based on 50% transition.

Next year you are going to have 100% transition, so on the comparable, there are going to be still some weight to carry there.

On the subscription it should be very nice growth.

Great, that's helpful, Tal.

Thank you.

Ben Bollin from Cleveland Research Company.

Good afternoon, thanks for taking my question.

I wanted to go back to the sales and marketing investments.

When do you expect to see larger incremental contribution from those efforts?

What is the duration of time that it takes to start seeing those results?

And then I have a follow-up.

I think remember last year when we invested we wanted to see a cycle, typically maybe 12 months, but bear in mind, we are in a competitive market.

We are focused on two focus areas, the mobility and the threat emulation.

On the threat emulation mobility, we already see results.

Much more significant in the zero-day attacks in threat emulation, the advanced threats, we see very nice increase.

It is a very strong, way over $10 million a quarter.

I can't provide the exact number at this point, but I can tell you we are very excited about it and the growth here was very nice.

So we see great results in the threat emulation.

So here we already see.

When you talk about the mobility we had a very significant increase, but it feels small now.

[Brexit], so I think it will take longer time.

And in the core you see very strong refresh.

We talked about double-digit unit, probably a significant portion out of it is a refresh.

And on the other hand, you see the pressures on the update and maintenance.

So all-in-all, you see our guide lines.

So I think, don't expect a major revolution there except for continuing on the execution on new products and new customers and new technologies to balance that phenomenon of a competitive environment.

Okay.

The second part, you talked a little bit about customers and how they have been looking at maybe some decisions a little differently.

Can you talk a little bit about how you have seen customer behavior change over the last several quarters, how has macro political, other concerns influenced either deployment strategies, duration, amount they're willing to spend, anything you have seen there would be interesting?

Thanks.

I wouldn't say that we have seen any major change in it, I think it is all the same things balanced.

Customers are trying to stay on tight budgets, on the other hand, we want to invest in cyber security.

Customers do want to consolidate their infrastructure, customers do value more and more the value of an integrated architecture and an integrated solution, and I think the more of them that get the experience of working with our advanced threat prevention, with our mobility, I think, realize that this can be real.

People can consolidate their infrastructure, they can get prevention and not just detection.

I think the key differentiator in our strategy compared to most other cyber security vendors is we fight for first time prevention, zero-day attack prevention, and not just follow-up or let the malware get through the network and try to detect it later.

I think the more experience customers are gaining with our solutions, I think the more confident they feel about the ability to actually activate the new (inaudible) technology and get to the level of cyber security they deserve.

Thank you.

Brent Thill with UBS.

Gil, you mentioned the strength in units, can you just tell us where you saw that?

Was it the enterprise or more mid-tier level in terms of the quarter?

I think the main strength that we have seen was in the core enterprise.

But, again, I think the best markets that I would say.

It is not the very high end deals that are unique, it is not other parts of the market, it is the core market that we have when we have many happy customers.

In the consolidation trend you are seeing in the cyber industry, do you think that there is a chance for you to play a role in having less appliance sales and selling more software through that consolidation phase through new solutions, or do you still believe that appliances are going to continue that type of pace you have been seeing?

I think customers -- appliances will still play an important role because customers need the platform to run any type of software.

I think we are definitely seeing more and more growth in sales in our software and our subscription.

We are seeing more and more growth of things that are fulfilled by the cloud.

I've talked about securing the cloud, so it is our cloud that helps customers secure their environment, like our [sun blessed] services, part of them are provided by the cloud and [ved grows].

So definitely, yes, we are seeing -- the fastest-growing of our business is the subscription and the software, and the software part, and thus accelerating in its growth rate and producing actually quite nice growth rate.

Thank you.

Scott Zeller with Needham & Company.

Hi, thank you.

Could you give us some color, please, around your business trends with service provider?

You had mentioned on previous calls, you had the super high-end appliances, and now on this call you have been mentioning that the success you have had in small and medium new appliance releases.

So as far as business with service provider at the high end and also with perhaps remote managed appliances, can you comment on how the business has going with service provider?

I think we've had decent business with service provider.

I think the potential for upside of that is pretty high and I think we are just scratching the surface of that.

I could just mention in Q2, for example, we had the major alliance with Telefonica around serving their customers, which is one of the largest telcos in the world, and that is notable.

But still, I think, this is a very nice opportunity for us moving forward.

Thank you.

Ryan MacDonald with Wunderlich Securities.

Good morning, guys, and I apologize if I missed this, but I know you talked about in the back half of the year for the guidance here and the impact coming from the model transition.

Did you quantify at all the expected impact from additional discounting in the back of the year on the guidance?

Not really.

I think, A, because it is very hard to measure it, right, because it is an effect that takes time to translate.

What we did talk about is we talked about -- and remember, we have in the original guidance a range -- but the numbers are out there already so everybody can look at the numbers that are out there also by the analysts and by Check Point.

What I said specifically, which is a very big impact, is relating to the product impact, and we said specifically on the revenue, the net effect from the transition from product into subscription is going to be a reduction.

So that is the specific effect of that one which is about, again, $8 million to $10 million for Q3 and $16 million to $20 million in Q4.

We did not calculate the effect of the discounting.

Okay, and just one quick follow-up on the transition to, the new sales of the new appliances, you mentioned in the quarter with the majority of the appliance sales or a large increase in appliance sales in second quarter there was an increase in units and dollars but ASPs were down slightly.

Would we expect in the back half of the year then a continued decline in ASPs as we transition to some of those newer appliances?

I think, again, it is too early to say, but we are already 50% transitioned, so it is quite a significant number.

And so far, I don't know if you follow the 2011 for us, but we saw a huge increase in the unit but there was a big decline in the ASP because they could have purchased for much lower price the same strength of appliance.

This time we actually succeeded to monitor it better and we've priced it in a way that allows us to balance it and the result was the unit increase in double-digit, the ASP decreased but not in double-digit, and the net/net result is that the dollar value for this quarter increased in the double-digit.

I hope it will stay the same in [H2] but it is very hard to predict.

So right now (inaudible) is to get it into a positive effect, not a negative one.

Thank you, guys.

That was our last caller and we appreciate you guys attending, and we will look forward to seeing you throughout the quarter and also in the coming end of year, or our third quarter report in October.

Thank you, and have a great day.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time and have a wonderful day.