Check Point Software Technologies Ltd (CHKP) 2016 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you, Mr. Meintzer, you may begin.

Thank you.

And I'd like to thank all of you for joining us today to discuss Check Point's 2016 fourth-quarter and full-year 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 January 26.

If you'd like to reach us after the call, please contact investor relations by email at kip@checkpoint.com, or phone at 1-650-628-2040.

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

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

These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act from 1934 included, but are not limited to, statements related to Check Point's expectations regarding business, financial performance and customers; the introduction of new products, programs and the success of those products and programs; the environment for security threats; and trends in the market; our strategy and focus areas for 2017; demand for our solutions; and our business and financial outlook including our guidance for Q1 2017 and the full year of 2017.

Because these statements pertain to future events that 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 January 19, 2017, which is available on our website, and other risk 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 and beliefs except as required by law.

In our press release, which has been posted on our website, we present GAAP and non-GAAP results, along with the reconciliation of such results, as well as the reasons for our presentation of non-GAAP information.

Now it's my pleasure to turn the call over to Tal Payne for a review of the financial results.

Thank you, Kip.

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

I'm very pleased to begin the review of the fourth quarter and the full year.

Revenues for the quarter increased by 6% year over year to $487 million, at the upper end of our guidance.

And our non-GAAP EPS grew 21% to $1.46, exceeding our guidance.

Before I proceed further into the numbers, let me remind you that our 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, as applicable, non-GAAP information is presented excluding these items.

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

Product and software blade revenues increased this quarter by 10% over the same quarter last year, reaching $288 million.

We continue to see double-digit growth in our core appliances, with strong transition to our new product families launched earlier this year.

This quarter over 85% of our appliance business comes from the new family.

The growth is coming from the small, mid and enterprise levels security gateway.

With continued success in our software blade subscription, with accelerated growth of 26% year over year, we see more customers choose the next-generation threat prevention and threat extraction packages, which include our advanced threat protection solutions.

Our software update and maintenance revenue reached $199 million, representing 2% growth year over year.

We continue to see higher discount rates versus last year, but the trend has slowed down, which is a good sign.

Deferred revenues as of December 31, 2016 reached $1.066 billion, a very strong growth of $160 million or 18% over December 31, 2015.

You can see the strong growth both in the short term and the total deferred revenue.

The healthy growth came from both software subscription and the support business, which had a great quarter.

Revenue growth during the quarter came from across all regions.

Revenue distribution by geography for the quarter was as follows.

47% of revenues came from the Americas, 38% of revenues came from Europe, the remaining 15% came from Asia Pacific, Japan, Middle East and Africa regions.

From a deal size perspective, the number of customers with transactions over $1 million increased by 15% to 99 customers this quarter, compared to 86 in the same period last year.

Transactions greater than $50,000 were 76% of total order value, compared to 72% in the fourth quarter of 2015.

Operating margin for the quarter were a strong 55% and aligned with our enhanced recruiting since last year.

We can see the fruits in the investments in our results, both in the core business as well as our focus areas in the advanced threat prevention and mobility.

Effective tax rate this quarter was 11%.

This quarter we had tax benefits relating to our R&D tax credits, tax settlements and lapse of statute of limitation on certain provisions in an aggregated amount of $21 million.

GAAP net income for the fourth quarter of 2016 was $222 million or $1.31 per diluted share, an increase of 21% from the fourth quarter of 2015.

Non-GAAP net income for the quarter was $247 million or $1.46 per diluted share.

Excluding the tax benefit I described before, results were great, as well.

Non-GAAP income for the quarter was $226 million or $1.33 per diluted share, representing an increase of 11% year over year.

Our cash balances reached $3.669 billion at the end of the quarter.

Our cash from operations for the quarter was $183 million.

Collections were very strong, with DSO similar to last year.

Income tax payments this quarter and for the year increased, mainly as a result of the tax settlement for prior years, as well as increasing advance tax payments for the current year.

Net of income tax payments, our cash flow from operations for the fourth quarter increased by 4%.

We continue to implement our share buyback program.

During the quarter we repurchased approximately 3 million shares for a total cost of $248 million.

Now let's take a look at the full year of 2016.

Revenues for the year were $1.7 billion, an increase of 7% from last year.

Total revenues from products and software blades grew by 10%, while our software update and maintenance revenue grew by 3% year over year.

Effective tax rate for the year was 18%.

Next year we forecast our effective tax rate to reduce around 17% annually, mainly the result of expected tax rate reduction in Israel for high tech companies.

The reduction is subject to adoption of tax regulation which is expected in March this year.

We took this expected decrease into account in our guidance that Gil will provide later on.

GAAP net income for the year was $725 million or $4.18 per diluted share, up from $686 million or $3.74 per diluted share in the same period a year ago.

GAAP earnings per share grew by 12%.

Non-GAAP net income for the year was $818 million, or $4.72 per diluted share, up from $766 million or $4.70 per diluted share.

Non-GAAP earnings per share grew by 13% and exceeded our guidance.

Excluding the tax benefits, the non-GAAP net income for the year was strong at $797 million or $4.60 per diluted share, representing a 10% increase year over year.

For the year, cash flow from operations reached $923 million, compared to $917 million last year.

Net acquisition-related payments accrued during 2015, and the income tax payments that I described before, cash flow from operation in 2016 increased by 3%.

During 2016 the Company repurchased approximately 12 million shares at the total cost of $988 million.

Now let's send the call over to Gil for his comments on the year and the quarter.

Thank you, Tal.

And good morning or afternoon to all of you joining us on the call today.

Q4 was a terrific finish to 2016.

We've seen the investments we made in our organization over the past couple of years bearing fruit.

We've seen strength in business across all geographies -- the United States, the rest of the Americas, Europe, Asia and Middle East and Africa.

We've seen a healthy growth in the number of new customers that have joined us this quarter.

We enjoyed triple-digit growth in our focus areas for the year, advance threat prevention and mobility.

And now advance threat prevention solutions have become a significant part of our business.

Our security gateway, which is the foundation of cybersecurity, have produced double-digit growth for three quarters in a row now.

Keep in mind that not all of the above trends are reflected directly in our revenue line, as many of the growth companies mentioned above reside in the balance sheet where you will also find impressive double-digit growth in our deferred revenues.

We have seen a nice business trend over the last two quarters.

I believe we're beginning to see market share gains for increased new customer addition and competitive wins.

Overall it's a great way to begin 2017 after closing out 2016 with such a nice result.

We just started off the year last week with our first sales kickoff conference for our American sales forces partners.

The conference had record level of attendance with approximately 1,700 attendees.

The [big four] were strategies for 2017 was highly positive across the board.

One of the key areas we discussed in the event was the future of cybersecurity and the realization that the future is already here.

Prediction we've made over the past few years have all become real.

Connected devices are integral part of our daily life and are constantly under attack.

It's hard to imagine our lives and business without our mobile devices, and in 2016 we clearly saw that mobile attacks aren't just something from the future.

They occur daily.

Sites like [woolygun] that we first published in November reached over one million Google accounts and began with Android malware and captured the main headlines of the Wall Street Journal in several geographies.

Malware like [dredscott] that we discovered in August demonstrated that mobile devices are used to penetrate corporate network and file servers.

During some period we have even seen mobile attacks approaching 20% of the overall volume of cyber attacks globally.

Expanded utilization of cloud computing is also a trend that continues.

Sometimes enterprise assume that the cloud is secure and don't realize that the cloud is just like traditional network.

When you connect a new network or server to the cloud, you need to apply the right security measures just like you do with your own premise environment.

We continue to see malware becoming more and more sophisticated.

And just this summer we saw all the national security agency toolkits are readily available to any hacker group on the planet.

So, clearly we see many of the trends that we've spoken about are already here.

Yet pretty much everyone agrees that cybersecurity is becoming more and more critical, we can see that a very small percentage of customers are utilizing the latest technologies to block advanced malware, protect mobile infrastructure and defend their cloud deployments.

According to our statistics, between 1% to 5% of enterprises utilize this technology.

This is quite alarming, yet it highlights the growth potential ahead for our industry.

Taking these needs and trends into consideration, we will focus in 2017 on the future of cybersecurity -- cloud, mobile and threat prevention.

We believe we have the best platform to secure every business environment with the highest level of threat prevention.

Our industry-leading solution delivers an integrated architecture with a single (inaudible) management, and, surprisingly, the only solution that blocks malware on the first pass before it enters the network.

What the industry refers to as first-time prevent mode is quite unique to Check Point.

With that in mind, we will keep working in 2017 to increase our market share by expanding our footprint, by adding new customers and expanding our install base.

Now, that brings me to our financial outlook.

You know my regular caveats.

There are risk factors, there are changes and, of course, some upside opportunities that are not always reflected in what we can predict.

But taking this into consideration for 2017, we expect revenues in the range of $1.85 billion to $1.9 billion.

Non-GAAP EPS is expected to be in the range of $5.05 to $5.25.

GAAP EPS for the year is expected to be approximately $0.70 less.

For the first quarter we expect revenues in the range of $420 million to $440 million, and non-GAAP EPS in the range of $1.15 to $1.20.

GAAP EPS is expected to be approximately $0.17 less.

I would like to thank you for participating in the call today and looking forward to hear your insightful questions.

Our first question comes from the line of Gregg Moskowitz with Cowen and Company.

Please proceed with your question.

Okay.

Thank you very much.

Congratulations on a phenomenal Q4.

Gil, last quarter you talked about some sales momentum following investment in sales and marketing that you had made previously.

And you've emphasized that even a bit more today in your press release.

But those investments actually date back to the beginning of 2015.

So, I'm curious as to, A, why you think it took this long before seeing the sales productivity of those hires really kick in; and then, B, more importantly, whether or not you think that those productivity gains are sustainable.

[the other is] first the ramp up of about a multi-year until we got some of the benefits of the expanded sales force.

And we are actually more aggressive now on implementing sales discipline, sales methods that will continue the trend.

Again, I hate to try and take this positive momentum and project too much of it into the future.

Last quarter I said one quarter trend is not enough.

Now we are seeing two quarter trend and the trend in the fourth quarter was even stronger.

So, I'm a little bit more optimistic about the expected highest productivity and expected results we can see from our sales force.

Okay.

Perfect.

And you mentioned that all geos were strong this quarter, but Europe looked like it was extremely strong.

Curious if there were any territory that you would single out as being better than you would have expected.

I think this quarter, again, the differentiation, what I'm saying is all regions were stronger looking at internal sales trend, but they are not always showing already in the revenue recognition.

And Europe was strong this quarter, so no doubt about that.

But the other averages were also quite strong in the fourth quarter.

Perfect.

Then just one quick one for Tal.

I suppose if there was anything to pick at with respect to these numbers, and it's hard to find much, it would be that cash flow from operations was down this quarter and only flattish for all of 2016.

I would think that Q1, just based on the balance sheet, is shaping up to be a very good collections quarter for you.

But can you give us some sense of expectation for 2017 cash flow and how that might compare to 2016?

Just to make sure that it's clear, the cash flow was actually very good.

I took out the increasing tax payment just so you'd be able to see the actual numbers.

Excluding the tax payment, it's moved up 4% Q4 versus Q4, and 3% annually.

Collections continue to be strong, so it's actually nothing new there.

The tax payments specifically relate to advanced tax payments.

The percentage sometimes change and then you pay one lump amount.

This year we paid that higher advanced payment so you will see less lump amount relating to the current year.

And we had a tax settlement that are related, which is included in the cash flow.

But excluding that it was in line.

And Q1 should be a strong quarter because it's collecting Q4 deferred revenue.

So, you're right that Q1 should be strong.

Perfect.

Thank you very much.

Thank you.

Our next question comes from the line of Walter Pritchard with Citi.

Please proceed with your question.

Hi, thank you.

Tal, I'm wondering if you could help us understand what the impact was of the product deferral in the fourth quarter.

I think you'd given the expectations that went into the quarter.

If you could update us on that.

And then if you could help us understand as we look at next year.

You obviously get some of that back as it comes through into revenue.

But could you help us understand the impact in 2017 of the dynamics you saw in 2016 with more product deferral?

Remember that the transition started mid this year, and we are at this point of time I said about 85%, slightly higher.

So, we still have transition in 2017.

So, there will be some effect also next year, as well.

We included it in our guidance, so you can see net-net in our guidance we assume somewhere between 6% to 9% growth next year.

So, it's relating to the transition, as well.

And then on the fourth quarter what was the impact in the fourth quarter?

I think you had said it would be somewhere in the $14 million, 15 million range.

It actually was -- you're talking about the growth, on the product -- the growth was around $13 million.

I just want to remind that it's very hard to calculate that numbers, so it's a theoretical number because of the mix between the products and the VSOE.

But, in general, it probably was around $13 million.

Great.

Thank you very much.

Thank you.

Our next question comes from the line of John DiFucci with Jefferies.

Please proceed with your question.

Thank you.

My congrats, too, on a really strong quarter.

Tal, every revenue line item was strong, including maintenance.

But, as you mentioned, you continue to see some higher discount rates.

I just want to understand that a little bit better, just to make sure we understand that's a ratable revenue line item.

So, we're seeing some effects from previous quarters as far as bookings.

But how much of that in this quarter, how much discounting are you doing, and why?

is it primarily still because of foreign exchange where in Europe, for instance, dollar-based goods are more expensive to someone in their local currencies, or is it more to do with competitive issues?

I think it's the same reason we talked before.

I mentioned that the rates of the increase has actually slowed down, which is a nice sign.

But, in general, you're right.

Remember, even in Q4 the dollar continues to get strong against the main currencies -- for example, the euro -- and there is a link between that and the increase in the discount, also, against the pound.

So many of the main currencies, the dollar still got strong against them.

It puts more pressure and the pressure might be reflected as well as at the discount rate.

It can be some competition in general.

It can be our focus on products, which are doing very well.

And it's pretty much the same reason that we've seen in the last, say, two quarters.

I would expect we'll continue to see that as rates fluctuate in either direction.

Yes.

I remind you that I explained that it takes like four quarters to see the full effect in the P&L.

So, the fact it's stabilized in the P&L is very nice phenomenon.

Great.

And if I could, Gil, a followup.

Gil, you mentioned cloud and how your team is focused on that and customers have to really look at it as just another network.

Can you talk to us a little bit about how customers are looking at it today, those that are moving to the cloud, and how they are thinking about using Check Point products?

Are you primarily being used for north-south traffic?

Or are customers when they move work to the cloud, are they also using your products for east-west traffic, which I know is used less often, even on the data center?

Are the cloud products for east-west traffic good enough and they're more focused on using what they're used to, your products, for north-south?

First, in response to what cloud you are referring to, there is the private cloud, which is in the company premises.

Yet the metric is segmented in a virtual way, not in a physical way, and that's more the east-west traffic.

We have products for that.

Our vSEC family knows how to work in this environment, with VMware, [enesix], Cisco ACI.

Again, we bring the same umbrella of security management, security capabilities, threat prevention into the private cloud environment.

The cloud environment today is doing quite well and is growing, but that's still the least of the problem the company has.

The bigger problem the company has, or the bigger risk, is with the public cloud, when we put workloads on Microsoft Azure and Amazon AWS.

And there the issue is even worse because their servers and networks are not behind the corporate firewall.

So, it's not just the issue of segmentation of the internal network but basically they're putting a naked server on the public internet with very basic, if at all, sometimes no, security capabilities at all.

And that does remind me what happened 20-some years ago when people were connecting to the internet without security, and then they starting to get surprised that they're infected and that the attacks come through.

Now, the cloud environment is not exactly like the physical environment, but there is a lot of similarities.

And the main notion that I want to convey, and we are trying to explain to customers, that Microsoft or Amazon gives us a great service on the cloud, but that service doesn't include segmenting your network or protecting you from advanced threats, and that's the security with every customer needs to take care of.

Just like when we are buying a server from an HP or Dell or any other vendor, we don't assume that we are getting the security fully built in.

That's a great opportunity for us because we are the only vendor that has this full platform that the customers can use the same security policies, the same security management tools, the same high level of security that we have inside the enterprise for the traditional network, for the data center or the private cloud, and for the public cloud outside the company premises.

Thank you.

Our next question come from the line of Shaul Eyal with Oppenheimer.

Thank you.

Good afternoon.

Also, congratulations on my end.

Tal, I think that last quarter you've indicated that the refreshed appliances accounted for over 70% of new products, if I'm not mistaken.

I might have missed this number earlier, if you mentioned it earlier, but how did it do this quarter and how did the [high-end] appliances all-in-all perform this quarter?

And I have a followup.

I related that this quarter it was over 85%, so it's continued.

And regarding the mix, depends which quarter.

This quarter there was a large increase, both in small and medium and in enterprise side.

So every quarter it's something else that drives us.

Fair enough.

And I think on the SandBlast, did the strong performance we have seen in recent quarters persisted?

Can you talk to us also about the better performing blades this quarter?

Usually you do provide some color about probably the top four or five performing blades.

Yes, SandBlast has a great quarter.

And, generally speaking, the growth rate of all of our advance security capabilities has come up this quarter.

So, that's a very good sign that we are keeping the growth rate and actually even increasing it at a pretty high pace right now.

I don't know if there's too much to talk about individual blades because most of our sales today are in packages.

And the packages, clearly the package, for example, for SandBlast, which is the highest end package, is increasing share.

The next-generation threat prevention is also increasing share.

And the next-generation firewall, which is now the basic package, is in all the other installations, that now pretty much the standard on all new installations.

Thank you for that clarification, Gil.

Thank you.

Our next question comes from the line of Karl Keirstead with Deutsche Bank.

Please proceed with your question.

Thank you.

It seems that in your explanation of the pretty solid results here, you're focusing on the transition to Check Point's new appliances as well as the increase in sales capacity that you made that's now bearing fruit.

So, those are relatively Check Point-specific issues.

I just wanted to ask Gil -- Gil, do you also think that the strong 4Q might have stemmed from overall security budgets feeling better, the broader uptick that might lift some of your peers, as well?

Thank you.

I definitely hope so.

I think, again, we hear all over that security is a high priority.

Again, as I said, I think that customers need a little bit of -- the market, not customers -- need a little bit more education about what it means because we see that the more sophisticated security technologies are o used today by a very small fraction of customers.

I definitely hope that we are seeing some of these trends coming to fruition and that will impact us, maybe [factaboray] other companies in our marketplace.

Okay.

Thanks for that.

And then maybe one followup for Tal.

Tal, as you put together your 2017 guidance, especially on the earnings side, I'm just curious what assumptions you're making around continued sales capacity buildouts.

Obviously the sales adds you made in 2015 started bearing fruit in 2016, so it's clearly a driver.

So, I'm wondering whether Check Point plans to accelerate, again, the sales capacity or will it be more normal as you had in the last several quarters?

Thank you.

I think for now the plan is to make it in line.

The effect that you see next year is the effect of the accelerated growth we had this year.

I think if you look at our guidance, you'll see that the tax rates will reduce next year to 17%, operating margin probably moves slightly down, and that will bring you to the guidance of the EPS.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Michael Turits with Raymond James.

Please proceed with your question.

Hey, guys, coming back to the maintenance issue, maintenance was up sequentially.

You had actually thought that it would be down sequentially even for a couple quarters given discounting.

So, just to come back to, I just wanted to clarify, at this point is that your expectation, that maintenance does continue to grow sequentially?

And is that primarily reflective of that greater discipline and lower discounting?

I think in general the fact that the discount increased year over year naturally translates into the deceleration in the growth rate.

The thing that is hard to predict is how much.

But this quarter was very strong, also, in our data maintenance.

And, as I said, there was a slowdown in the discount which enabled it to stay actually in the same rate, which I [respect].

Right.

So, again, on the sequential basis, the quarter-to-quarter basis, that had been somewhat of a concern that you had sequential declines.

Is your expectation, at least at this point, that we're now sustainably on maintenance growing quarter to quarter?

Again, we give a guidance for the total revenues and not line by line.

So, we take a few scenarios into account in our guidelines.

Okay.

And if I could get one more followup here, you're getting that greater attach on some of your blades, it sounds like on most of them.

How is that related to ASPs and the size of the appliances that you're selling, both on the capacity size and on a dollar basis?

Is that greater demand for blades driving demand and sales of larger boxes?

We actually see very strong increase in the unbundled blade, as well.

So, the fact that, when you sell an appliance you have the bundle, and as we all know this year the bundle is larger on the old appliances.

But even if we eliminate that one and we look at the growth in the unbundled blade when customers are just purchasing the packages of the blades, detached from the appliance, we see a very strong increase of customers adding and moving up in the package level from next-generation firewall to next-generation threat extraction and threat prevention.

So, there's higher ASP per package as we move up.

Okay.

Thanks, Tal.

Thank you.

Our next question comes from the line of Gabriela Borges with Goldman Sachs.

Please proceed with your question.

Great.

Good afternoon, thanks for taking the question.

Maybe just a little bit more qualitative commentary, if you could, on the double-digit growth that you're seeing in the core appliance business line.

Maybe you could just help us directionally on how that's trended over the last year or so, and maybe, as well, historically how it compares to what you might have seen in the 2014, 2015 or 2016 time frame.

Thank you.

We don't provide this quarterly, but I think we discussed it specifically this year, typically we give the total product booking.

We don't relate to the growth of the units separately just because there can be a mix shift that can change it.

The reason we talked about this year is exactly because it was a year that we launched a new product line.

And when we look at when we launched it four years ago in 2011, we experienced a significant increase in number of units, but the ASP reduced significantly.

So, the total result was a net zero sum gain, basically.

This time we launched it, I think, in a smarter way.

We launched it with a price level that fitted the increase, as well, in the capacities of the appliances.

And the result, we succeeded to enjoy both an increase in the number of units and an increase in the dollar value.

So, it was a quite successful transition for customers and for us.

That's very helpful.

Thank you.

As a followup, if I could, maybe on the opportunity that you see ahead in the advanced threat protection space, could you maybe just describe a little bit on how customer are allocating budgets towards advanced threat protection for 2017, and whether you still primarily see it as a greenfield opportunity or whether there's a little bit of displacement, as well?

Thank you.

First, we have [few bucco], we have some nice displacements of vendors that has been in this industry for a few years.

But mostly it's a greenfield opportunity.

As I mentioned today, about 4% of customers actually use advanced threat prevention capabilities.

A little bit more, by the way, buy it.

There are customers that are buying it and are not using it yet.

And that's, from my perspective, it's still a greenfield.

And, again, even with percentages that are in the single digits, are not necessarily coverage of the entire enterprise.

This is customers that have purchased this kind of technology.

It still doesn't mean that they are using it everywhere on the network or on every gateway that they have.

So, the opportunity there is quite large.

And I think that for the first we're seeing that this is getting to a critical mass.

This is already a volume -- it's a nice business volume for us.

We see hundreds and sometimes even over 1,000 customers which we are writing every quarter.

I think the approach that we have, first time prevent, that's fully integrated into the security infrastructure is relatively unique in the marketplace.

And I definitely hope and that's the trend that we are seeing, that more and more customers will use it.

Thank you.

Congrats on the quarter.

Thank you.

Our next question comes from the line of Sterling Auty with JPMorgan.

Please proceed with your question.

Yes, thanks.

Hi, guys.

I'm wondering, looking at the trends in gross margins through 2016, wondering how much of that trend was because of the move into the new appliance platform.

And is there the potential to see gross margins actually start to improve in 2017 as you maybe get a little bit of volume and scale on the new generation of appliances?

The gross margins remain pretty much the same.

If you're looking at the product, you can see somewhere like 82%, and the same with the subscription, the same with software blade.

The mix between product and software blade and support is the one that can create some change.

But even if you look at this quarter you see 88.2% gross margin for the total versus 88.3%.

So, pretty much the same.

And I think hopefully, it's pretty consistent.

I'll be very blunt.

My focus is not on improving a few basis points on the gross margin.

The focus should be on delivering the best value to the customer and winning a new customer in a new gateway.

I think we're pretty efficient on managing the margins but that's not the focus.

The success for Check Point will come -- let's put it this way, there aren't too many points we can squeeze out of our P&L right now.

What we can do is actually grow more.

And that should be our focus and that's what I'm driving the sales force to do, is growing the deals we are working on, especially approaching new customers.

And I think in the last quarter, I think you've heard from me on this call, I'm very positive about the way they started executing on that.

I think that's very fair.

One followup, maybe, to an earlier question -- if I look at the benefit that the lower tax rate drops to the bottom line, it doesn't feel like all of it is actually showing up in the EPS guide, which would seem to suggest maybe some investment in the OpEx lines to maybe support growth, as you said.

Where should we think about that growth coming in terms of sales and marketing versus R&D and maybe by geography?

You're right.

That's what I was relating before.

You're absolutely right.

The reduction in the tax enabled us to continue to invest.

I said that the growth should be pretty much in line for next year.

The reason you see some operating margin reduction is a result of the investment of 2016 that is fully translated only in 2017.

I think the growth is expected across the board, but mainly in sales and marketing and in R&D.

Thank you.

Thank you.

Our next question comes from the line of Andrew Nowinksi with Piper Jaffray.

Please proceed with your question.

Thanks.

You talked about an increase in new customer wins.

Can you give us any color on which vendors you displace most frequently in those new customer wins?

The usual [tactical] competitors, but I don't want to get into this name dropping and bad-mouthing of one another.

You know the players in our industry and I think we have competitive wins against all of them.

All right.

Fair enough.

And then your CapEx has remained relatively consistent each quarter.

Are you expecting any large projects in 2017 that could drive up CapEx from the current level?

Actually, if you recall, the only thing is the building that we invest in and supposed to finish in 2017, right?

So, last year you saw in increase in the CapEx.

Most of the increase relating to the building.

And for next year it's probably going to be -- the building is remaining about probably $25 million, which is completely in line with our original forecast.

It's just that that's the last year.

So, in total I would say you should expect increase in the CapEx that's relating to the building.

Okay.

Just one last question, you had the highest billings growth you've had in five years here.

Would you characterize that as an inflection point in your billings growth, or were there just some large deals in the quarter that may have boosted that growth rate?

Thanks.

We're definitely hoping that we are at an inflection point.

Again, I'm always cautious about trying to project from the past to the future.

The trends that I'm seeing are definitely positive.

I would just add that even when you look at the short term, I always said the long term can fluctuate, but if you look at the short term you can see it was very strong.

Short term typically is not relating to one large deal.

It's more the run rate.

So, it's a good sign on that line, as well.

Thank you.

Thank you.

Our next question comes from the line of with Tal Liani with Bank of America.

Please proceed with your question.

Hi, guys.

Two quick questions.

Number one is just on SandBlast, last quarter you said roughly $20 million in billings and it grew triple digits.

How was the adoption this quarter?

And if you can give us a little bit more color?

Second question is outlook for 2017, understanding your plan.

Last year you invested heavily in sales and marketing and go to market, and you also had new products.

What are the focus areas for 2017?

Are there any special verticals you're going after, you're increasing focus on, or products or anything else?

Thanks.

First of all, Tal, we've seen tremendous success in Q4.

The billing was much higher, triple-digit growth.

Everything continued in the same trend or slightly even better.

For 2017 the focus areas technologically are cloud, mobile and threat prevention -- advance threat prevention.

That's a big focus for us.

The cloud, by the way, is something that's new.

Last year we focused -- we had cloud solution, we built infrastructure for that, we built field-enablement activities, but next year we are putting much more emphasis on the cloud.

And we are adding it to the mobile and threat prevention, that were the focus and success of last year.

In terms of vertical, we're actually seeing success in many different verticals, including local government, healthcare.

We are actually seeing a lot of these opportunities from these verticals.

Finance, of course, remains our largest vertical and it continues to be that way.

And, Gil, when you say cloud, do you mean more selling through cloud carriers, cloud providers, or more selling to enterprises helping them more with their hybrid cloud environments?

It's mainly selling to enterprises.

A lot of these sales and marketing activities are done in conjunction with the cloud providers.

We have a nice cooperation with the large cloud providers.

Thank you.

Thank you.

Our next question comes from the line of Fatima Boolani with UBS.

Please proceed with your question.

Good morning.

This if Fatima on for Brent.

Thank you so much for taking the questions.

Maybe a first one for Gil.

Gil, in your prepared remarks you did make a specific mention around the nice increase that you did see in new customer wins.

I'm wondering if you can talk about any patterns or behaviors that stood out from your new customer acquisitions in the way they buy or make purchasing decisions or what they're buying.

And then a followup for Tal, if I may.

I don't insight, too much insight on that.

I think we've seen the regular patterns, I think some of which relates to the better perception that Check Point has in the marketplace and the increased brand awareness that we have.

And some it is relating clearly to our focus, sending people to speak to new customers.

When we do that, we see tremendous results.

We, actually, by the way, did some brand awareness campaign and brand awareness surveys, and we've seen that our brand awareness has went up quite nicely.

And, actually, our brand values is actually quite strong, especially with non Check Point customers, or even with non Check Point customers.

That's helpful.

And a question for Tal, just with respect to the operating income and operating margin line, can you help us quantify the impact from currency devaluation with the pound being down as much as it was?

I'm just trying to understand how much that would have contributed to your operating margin results.

You remember that our price list is in dollars.

So, when you look at expenses, it was pretty minor.

Year over year, all the currencies, the change in the dollar, didn't make a big change.

Bear in mind that we hedged from the beginning of the year.

When we look at the revenues, it's hard to calculate because, while we price in dollars, we saw a significant increase in the discount.

And that's why I was relating to it.

UK is a big country for us, and if the customers lost the pound value -- or Europe, in general, you can see from our numbers it's over 40% of our business.

If the euro is getting to par value with the dollar, that's a big effect on our customers.

These results actually shine when you take into account the fact that the currency lost quite a lot of percentage, even just in Q4.

But we don't calculate it because -- I mean, I can calculate it for you.

It's probably going to come to an effect of more than $100 million in general.

That's why I don't provide it because it's an over number, and we're trying to deal with the facts and not to make --

The negative impact of $100 million.

Of course, negative impacts.

So, actually, we did great result even though the currency and the revenue is putting a lot of pressures on our customers.

That makes sense.

A quick one for Gil, if I can sneak one in.

R80 haVe been GA now for a year.

Can you help us understand what proportion of the base has moved up to R80, and to what extent you think that has helped with the quick adoption of the new product family?

And that's it for me.

Thank you.

R80, the security management portion has been in market for about a year.

And I think acceptance is nice and we're getting a lot of very good feedback.

Still, the R80, the gateway side, that is still not out and expected to be out soon.

So, that can drive even more adoption, or really unveil all the functions that we have in the versions so it comes not just to the management side but to the gateway side, as well.

Thank you.

Our next question comes from the line of Keith Bachman with BMO Capital Markets.

Please proceed with your question.

Hi.

Many thanks.

I wanted to ask you about your outlook for the market and FY17 in a couple different dimensions.

Number one, some of your competitors have talked about perhaps some excess capacity being out there from the buying patterns associated with calendar 2015, 2016.

I just wanted to hear if you think at this juncture, as we look at calendar year 2017, is there excess capacity?

And then, B, if you could talk a little bit about your wins and how that's embedded in your outlook.

Why are you winning and what's causing those?

And then the final part of that is discounting.

You mention the pace has been abating.

I'm curious, if your outlook is strong for 2017, why is there any outside of FX?

In other words, is the competition using, in your view, discounting to try to win deals, or are they in fact responding to FX, as well?

So, three questions there as it relates to your calendar year outlook for the industry.

Thanks.

I think it's very hard to say.

Clearly in our industry there is a lot of companies.

Not just the big ones.

There's thousands of startups, that employ many people, and there's a lot of selling capacity in the marketplace.

As it relates to Check Point, I don't think that we have excess capacity.

I wish we could have had even more people and utilized them in the right way.

And, again, I think the key for us is not the number of people but the methodology and the process and how we work.

I think once we get all of that, and once we get improvement on that, I won't be shy for maybe even more people because I think that we have a tremendous opportunity still out there in the marketplace.

Discounting -- we are in a competitive market.

Discounting is used.

I don't think that's the main issue that prevents anyone from achieving better results.

But, clearly, there is a competitive market and people are using also discounting as a sales tactic.

Okay.

If you could just talk a little bit about your wins then.

You mentioned you thought you gained incremental market share this quarter.

If you could talk a little bit about wins.

Why are you winning those shares?

I assume -- is discounting helping those wins?

Or what's the technology advantage that you think is driving those incremental opportunities for you?

Many thanks.

Discounting is sometimes necessary to win but it's definitely not the reason we are winning.

The reason we are winning is clearly the technology.

It's first the fact that we can do security consolidation, it's the security management.

And, again, it's not just management because it's easier, the technical aspects of it, it's the operational efficiency that the company has seen that.

With Check Point you get external data from companies like [enesesinoggers] which would tell you that you'd need 50% less stuff to manage a Check Point security environment than a competitor's security environment.

And when you add to that the consolidation of multiple security features, it's even better.

The quality of product, the quality of security is also coming up quite strongly by customers.

So, I think that's the main tool, from all our service.

And we check that and do even quantitive service with customers on that.

These are the operational efficiency and the level of security, are the two primary factors coming from customers to why they choose Check Point.

Okay.

Congratulations on a nice quarter.

Thank you.

Our next question comes from the line of Philip Winslow with Wells Fargo.

Please proceed with your question.

Thanks, guys.

Congrats on a great quarter and outlook.

I just actually want to rewind the clock back to 2012.

You guys have talked about on average maybe five years refresh cycles for hardware.

And if I think back to 2012, that was when you guys had talked about the trading down effect.

But it was a very strong year from a unit perspective.

As you think about 2017 and potential of refreshing that big uptick that you have in units, how are you contemplating that in your guidance?

What effect do you think you see from a potential refresh of that increase in units in 2012?

Yes.

Remember that the price and the budget the customer had back then.

The units increased.

When you take the entire four quarters, you see that it was a very strong double digit in the beginning and then it started to move down and the ASP moved up.

So, the full year actually ended up a normal year when we finished the year of the transition.

As part of the guidance that we provide, that's why you have a range.

There's two things that affect.

One is the number of units, and second in the ASP.

The higher the units, the lower the -- the higher the ASP, the lower the quantity.

So, it's really hard to predict the mix of the units.

And it's all part of the range of the guidance that we provided.

Great.

Thanks.

Congrats again.

Thank you.

Our next question come from the line of Shebly Seyrafi with FBN Securities.

Please proceed with your question.

Yes, thank you very much.

I just want to reconcile.

Your security gateway business, you said, was up double digits -- I assume year to year.

With your product and license growth, which was only up 2% year to year, can you just talk about the puts and takes in that product and licenses line?

Sure.

That's relating to the transition that we had between the old appliances and the new appliances.

The new appliances include a bigger software blade package.

So, while total ASP per unit increased significantly -- and that's what I was relating in double digits -- some of the dollar value is being deferred and going to deferred revenues, and is recognized over four quarters.

That's what Gil and me was relating to, that you can see a lot of it going to the deferred revenues, where you see the 18% growth.

Okay.

And, separately, according to my geographic segmentation, I'm getting that -- with rounded estimates because you only provided rounded percentage of revenues -- your Americas segment grew 4% year to year in Q4 versus 8% to 9% the prior two quarters.

And I'm just wondering -- it looks like you did very well in Europe -- whether you're seeing a slowdown in the Americas.

No.

The answer is that's where you're seeing revenues.

Revenues can be affected by a few accounting rules.

So, you see some quarters can be higher, some quarters lower.

You actually see the PAC was very strong, then Europe, then the US, you're right, in the revenues.

But what Gil related, which is the business, Americas was actually very strong.

Very strong, yes.

Okay.

Thank you.

Thank you.

There are no further questions at this time.

I would like to turn the call back over to Mr. Meintzer for closing remarks.

Thank you, everybody, for joining us today.

We look forward to seeing you during the quarter out on the conference circuit and during visits we do.

And looking forward to having a good year with everybody.

Thank you and have a great day.

Bye bye.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.