Check Point Software Technologies Ltd (CHKP) 2017 Q1 法說會逐字稿

Greetings, and welcome to the Check Point Software First Quarter 2017 Financial Results.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Kip E. Meintzer, Head of Global Investor Relations.

Thank you.

Mr. Meintzer, you may begin.

Thank you, Tim.

I would like to thank all of you for joining us today to discuss Check Point's 2017 first 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 May 4. If you'd like to reach us after the call, please contact Investor Relations by e-mail at kip@checkpoint.com or by phone at +1 (650) 628-2040.

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

During the course of this presentation, Check Point'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 Exchange Act of 1934 include, 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 the trends in the market, demand for our products and services, our expectations regarding taxes, our expectations for shares outstanding calculations and our business and financial outlook, including our guidance for Q2 2017 and full year 2017.

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 April 27, 2017, which is available on our website, and other factors and risks including those discussed in Check Point's most recent annual report on Form 20-F, 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 it's my pleasure to turn the call over to my Tal Payne for a review of the financial results.

Thanks, Kip.

Thanks everyone for joining today.

We had a good first quarter and a great start for the year.

Revenues for the first quarter increased by 8% to $435 million towards the top end of our guidance, and non-GAAP EPS grew 13% to $1.20 at the upper end of our guidance.

Before I proceed further into the numbers, let me remind you that our GAAP financial results include stock-based compensation expenses, 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 13% over the same quarter last year, reaching $238 million.

Product revenue growth came from our core appliances as well as our advanced threat protection appliances and management gateways.

Our Software Blade subscription revenues continued grow with a strong 27% year-over-year.

Costumers continue transitioning to higher value packages, which include our advanced threat protection solutions.

In addition, some of the acceleration growth came from the shift of revenues from the product to subscription as a result of the bundling of the new appliances.

Our software update and maintenance revenues reached $197 million, representing 2% growth year-over-year.

Deferred revenues as of 31st of March, 2017, reached approximately $1.1 billion, representing a growth of $180 million or 20% over March 31, 2016.

Short-term deferred revenues increased by 15%.

Revenue growth during the quarter came from across all of our regions.

Revenue for distribution by geography for the quarter was as follows.

48% of the revenues came from the Americas.

35% of revenues came from Europe.

The remaining 17% came from Asia Pacific, Japan, Middle East and Africa regions.

From a deal size perspective, the number of customers with aggregated transactions value over $1 million increased by 16% to 50 customers this quarter compared to 43 in the same period last year.

Transactions greater than $50,000 were 70% of total order value compared to 69% in the first quarter of 2016.

Operating margins for the quarter were 54%, in line with our expectations.

Our income tax rate for the quarter came at 17%.

The reduction of tax rates for technology companies in Israel, from 16% to 12%, is subject to tax regulations that are expected to come out in the near future.

This quarter, we adopted new accounting standards under which the excess tax benefit of our (inaudible) options is now reflected in our income tax provision, whereas previously it was reflected in equity.

In addition, under the standard, we recorded different tax assets as of January 1, 2017, in an amount of $86 million, and increased retained earnings for the open balance sheet.

This is purely a new accounting treatment and does not change the cash taxes we pay in the U.S. With the adoption of the standard, our tax rate may vary based on stock price.

GAAP net income for the first quarter of 2017 was $183 million or $1.08 per diluted share, an increase of 15% from the first quarter of 2016.

Non-GAAP net income for the quarter was $202 million or $1.20 per diluted share, an increase of 13% year-over-year and at the top end of our guidance.

As our share price levels elevated since we guided in January, the number of fully diluted outstanding shares used in the calculation of our EPS, were approximately $1 million higher than we expected originally.

This highlights even all of the EPS achievements.

Going forward, based on the current share price and buyback levels, we expect the number of shares to continue reducing by approximately $1 million shares a quarter, reaching approximately 165.5 million shares in Q4 2017.

Our cash balances continue to be strong.

We reached $3,797,000,000 at the end of the quarter.

Our cash from operations for the quarter increased by 10% to $355 million, in line with our strong collection from customers.

We continued to implement our share buyback program during the quarter and repurchased approximately 2.6 million shares for a total cost of $248 million.

Now let's turn the call over to Gil for his comments on the call.

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

Tal just spoke about we had very nice performance during the first quarter, continuing the trend of the last several quarters.

We're experiencing great customer uptake in our key focus areas of cloud, mobility and threat prevention, which is reflected in the continued triple digit growth across these product lines, underscoring the success of our platforms and the investment we have made.

Customers are continuing to consolidate their infrastructure with Check Point, and our value proposition of exceptional security with our unified architecture is resonating quite well.

Just last week, I met with a financial customer that said 3 years ago, he was promoting the best of Breach strategy with multiple vendors.

Since then I've switched to Check Point unified solution and I couldn't be happier.

Every customer that I've met within the past few weeks has had the need to increase their security footprint, but are unable to add headcount and complexity at the same pace, which is leading customers to realize the benefit of the Check Point architecture that enables far better security with no compromise.

We continue to see an increasing number of customers beginning to realize that cloud security should be on their list and that mobile security should be a critical part of their security strategy.

Keep in mind that we are the only company today that has a cloud solution for all leading cloud environments, including the private cloud environment of VMware, Cisco ACI and a few others, and the public clouds of Amazon AWS, Microsoft Azure, and Google Cloud.

As I've mentioned before, we’ve begun to see cloud sales picking up nicely.

Finally, our focus on new customers is also resonating well with our sales force and channel.

And it was reflected in the number of nice new deals wins during the quarter.

We're seeing some good examples of customers from all sectors, retail, industrial, government and many others standardizing Check Point and switching from other vendors.

As you can imagine, I'm quite pleased with our results so far.

In the beginning of the year, we talked about our focus on the future of Cybersecurity.

Last week, during our Check Point Experience user conference (inaudible) architecture that realized (inaudible) Check Point Infinity, our revolutionary new security architecture is designed to meet the critical security needs of enterprises and organizations of all sizes.

Infinity is the first consolidated security platform that spans across networks, cloud and mobile, leveraging common infrastructure, threat intelligence sharing and open interface.

It offers unparalleled security across network, cloud and mobile, while also providing preemptive threat prevention to help ensure its customers are protected against the growing number of sophisticated known and unknown attacks before they occur.

Another differentiator of Infinity is the single management console with modular policies and integrated first visibility to efficiently centralize security.

Infinity is incorporated across all Check Point's products.

And with the introduction of Infinity, we also announced new version of our key products just R80.10 for our security gateway SandBlast Mobile for the iOS and Android, and the new generation of super-high-end data center security gateways that will provide the highest level of threat prevention at pretty much any speed.

With Infinity's Check Point, it arms customers with innovative solutions that allow them to elevate their security infrastructure and adapt to changing business needs as well as the evolving threat environment.

One of the most damaging threats showing up in the organization today is ransomware.

Hospital, retailers and many others are just some of the types of organizations that are being impacted by damage -- by this damaging malware.

To combat these threats, we introduced Check Point Anti-Ransomware technology that enables businesses to stay protected against cyber extortion, and even the most sophisticated ransomware.

Overall, I believe we are executing nicely with our plan for the year.

There are still many things that need to be done, but we’ve started the year on the right note.

Now you all know my usual caveat.

The future is hard to predict and there are many additional factors and challenges that can lead to outperformance or underperformance, this must be taken into consideration when we provide a projection.

So we have read our financial outlook for the second quarter and it reaffirms our annual projections.

We expect revenues in the range of $440 million to $465 million.

And non-GAAP earnings per share in the range of $1.17 to $1.25.

GAAP EPS is expected to be approximately $0.14 less.

There is no change to the full year outlook.

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

(Operator Instructions) Our first question comes from the line of Gregg Moskowitz of Cowen and Company.

It sounds Gil, like SandBlast did very well again, but I'm wondering if you can elaborate on where you are seeing the strength.

For instance, is it mostly selling into installed based, or is it helping to drive a lot of new customer acquisition as well.

And also, are you having success displacing incumbent APT solutions or is it primarily greenfield?

Actually, the question is a very good one.

I think it is all of the above.

I've seen customers replacing some of the incumbent dedicated APT solutions, I don't want to name names, but I think you can guess which one.

And I've seen many cases with the installed base, and I think we are also winning a lot of new customers showing them the overall architecture and our ability.

So from the examples that I've seen in the last few weeks, and from the analysis of wins that we’ve done just recently.

I think that we're winning in all these 3 areas.

Just one other question.

What are your expectations around customer adoption of Infinity?

And what can that do for the financial model?

And then also do you need to add more endpoint technology to truly fulfill your vision?

I think it doesn't change in a big way the financial model, it's part of the existing products that we have and it's a bigger picture.

After launching it in the conference last week and meeting with many customers, I think the message is resonating very well.

To the customers now it's a much easier way to look at what we're doing and put it under the Infinity umbrella rather than look at different products and different capabilities as a separate thing.

So I hope it will result in a higher level of adoption of our technologies.

In terms of the endpoint, I'll actually overlay this endpoint technology, the SandBlast Agent that we have for endpoints, I'm talking about PCs not just mobile because the mobile world is different.

It is actually resonating very well.

Even though I don't want to -- I'm not looking at it necessarily as a competitory replacement for the traditional antivirus vendor.

I'm looking at us as an additional layer addressing the more sophisticated need, it's in the real way to fulfill the end-to-end advanced threat prevention capabilities not in a way to get into the I think the market of antivirus, which is already saturated.

Our next question comes from the line of Jonathan Ho of William Blair.

I just wanted to start out with your comments around the public cloud opportunity growing nicely.

And maybe if you could give us a little bit more color in terms of where you're seeing the opportunity set grow there and perhaps, maybe what the impact is on your edge of network firewalls as well?

I think the cloud security is a great addition to what we're doing on networks.

And I think what many companies -- what I've seen with many companies is that in addition to our data center, in addition to our existing application, we are building new applications on the cloud.

I think in many cases, they don't realize even that they need security, they believe that if they take a server on the cloud, it's a cloud by a well-known vendor, it must be secure.

And they don't realize that as much as these cloud companies they are doing good job to defend themselves, the server that you're getting on the cloud is seeking very wide open on their center of the Internet.

So it needs to be secured.

I think we see customers that are starting to realize that they don't have tools to incorporate into it their existing enterprise management capabilities, into their existing enterprise security policies.

And by the way, it's very, very hard to do because you don't have control of where these servers are, which servers are there and these are all the capabilities that we are building into our cloud, security like autoscaling with the cloud, connecting it to the enterprise management, just like they are used to with our management solution, and I think we are starting to see pickup.

It's still small, but I think right now we are seeing that our public cloud solutions are equal in size and maybe even higher than the private cloud solutions.

And that's a very good trend, and as I mentioned, overall on our cloud solution we’re seeing triple digit growth.

Fantastic, fantastic.

And then relative to the long-term deferred -- that grew a little bit more quickly than the short-term deferred this quarter.

Can you just talk about maybe the dynamics there around some of the duration of your contracts?

Both of them were very healthy, as you can see.

Typically, I would say about long-term contracts that it can fluctuate.

Some quarters can go higher than the others, depends on the size of the transaction.

It many times depends on the customer's budget and their needs.

So when I look at the short term, you see it still grew by 15%.

Long-term, it can grow one quarter and the next quarter it can go down.

This is one of the good quarters and it moved even further up.

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

The question is for Gil.

Gil, what do you mean by unified architecture?

Are you talking about products that are simply being integrated under one vendor?

Or is there a commonality of certain foundational technical components across products that are typically thought of independent of each other?

So it's the second, which basically we have one architecture, one common infrastructure.

The technologies we identified for it is shared between the product.

The technologies [toward block for us] is shared between the product.

Of course, the management is the same software, the same management console, and I think where things are different is that each device or each component of the infrastructure might have different enforcement methodology.

On one end it can be the network software that knows how to pull the data from the network and now replace it with the mobile software and so on.

But the software is the same software, it's not just product integration.

It's the same foundation.

Okay, great.

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

You've talked in the past about a greater percentage of your sales being ratable revenue.

And this shows in your results.

Can you roughly tell us about what percentage in the sale was ratable, let's say a year ago versus today, and where that can likely go?

Before the call, it was -- obviously the maintenance is a similar number because it growing at a slower rate.

The subscription was about 20% and now it's 27% growth so it's around 22%, it's probably around 62% right now.

But it's -- I can calculate it in a minute and I'll get it back to you.

Okay.

If that continues -- the reason it is interesting to us is if it continues, obviously the ratable part repeats itself going forward.

So -- and it's also those renewals, much more profitable than when they are first sold.

So it helps both with growth, but also profit.

Yes, of course.

Just bear in mind that as we add new blades and more products that we launch are as part of the subscription.

The subscription portion is growing and we’ve seen it very consistently since probably 2008 or 2009 when we came with the Software Blade Architecture.

So the trend is clear that more and more portions of our revenues are coming in subscription.

So I expect it, in general, to continue and go up.

How much?

It really depends where it will find the balance in the future, but I think it is going to continue growing.

And when you look at cloud as well, the majority of the services that we provide on the cloud are monthly payments or annual payments or by the job and therefore, they are also part of the ratable subscription portion.

So in general, I would say the trend of continued increase I expect it to continue.

Okay.

If you figure out that number, that would be great.

What it is today versus in the past.

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

One for Gil, one for Tal.

Tal, on the maintenance discount issue you had mentioned last quarter, I think, that it was -- it had stabilized versus what happened in 4Q.

If you could provide an update for this past quarter?

And then for Gil, I would love to ask you about the impact of the public cloud and I don't mean demand for vSEC or your virtual products that are deployed on AWS as you are in GCP.

But what I mean is whether as your clients evaluate a future move to the public cloud model, whether that's changing their behavior for purchasing Check Point products that are deployed on premise, for instance, might some of them need fewer but higher throughput appliances?

Any color there might be interesting.

I will take the first one.

First, maybe I will just conclude the answer to the previous question about the portion of ratable revenue versus the product revenue.

So in 2008, when I joined, it was about 40% for that and 60% update in maintenance -- so the support portion.

So it was around 60% on the ratable.

Now we are -- in Q1, we were 71%.

In the average 2017, we were 67%.

So for every year, it's increasing 1% or 2%.

So it is growing and it's becoming a more stable model.

So that is to the previous question.

Regarding your question to the discount, I am not going to update it every quarter, because obviously it can fluctuate, but I can tell you the stability we've been seeing since Q3 continues, so the levels of discounts in Q3, Q4 and Q1 are very similar, which is great news.

And the increase that we saw was in Q3, if you recall, last year.

So we had an increase in Q2 last year, and since then we saw the stabilization, which is nice.

And about the cloud, I haven't seen that the cloud is changing a lot of customers' behavior of their physical network.

We still have physical network, we still need to secure them, sometimes they need to connect them to cloud, which means that they need some appliances or some devices to do the VPN through the cloud.

The cloud in most cases, again not all of them, but in 99% of the cases is an extension and expansion for the existing network.

Our next question comes from the line of Shaul Eyal of Oppenheimer.

Gil, or Tal, can you talk to us on ASP trends, discounting trends, are we seeing some moderation or some stability as it relates to ASPs and also in the context of the competitive landscape?

Yes, I will say when we talk about ASP of products, the impaired product family stayed stable, so that was nice.

Obviously, the average ASP is depended on the mix per quarter.

And when we talk about update in maintenance subscription, we did see -- and that was my previous answer, we see stabilization there since Q3 last quarter -- Q3 last year, so not exactly what was in Q2 last year.

It's probably the fact that when we launch a new product, our sales teams are focused on introduction of our new product.

They did a great job there and we see an increase in our product core appliances, management, emulation, advanced threat protection in general.

So the team is focused on selling the new product and maybe there was some increase in the subscription, in the support discount as a result.

We talked about it at length last year, but since then we saw stabilization of those levels.

Got it.

And Gil, over the past few quarters, have you started taken any different approach the way you look at your distribution channels, anything specific you can share with us?

And also maybe one word about the strong performance I think you guys have seen in APAC this specific quarter?

Obviously, we may keep making changes and anything more is sellers and tradition.

There is no change in strategy, and I think our major relationship with the Chairman -- all the relationships, not major.

I think all the relationships in the channels are very good and we're expanding and we are growing them.

And I think we're seeing some nice turnarounds for resellers that were lower performers that are now becoming much higher performers.

We're signing up a little bit of new resellers.

So there's no change in that.

And on APAC, maybe just a word?

Okay.

APAC has been a region that is performing very, very well in the last few quarters, very nice growth rate, leading the growth rate for a few quarters.

I think the execution area is quite nice.

And nothing -- primarily positive.

And of course between countries it varies.

There are some countries that are behaving better.

There are some countries that we are making changes.

But overall, as a region I can't be happier.

If the entire world would behave that way, we would be happy.

We wouldn't be discount.

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

So you had a very big product launch, including 2 new high-end appliances.

Do you think you experienced any sort of pause in spending at any of your large customers ahead of this launch, similar to one -- what one of your competitors cited on their earnings call?

No, not this time.

First, I think, we're keeping our launches relatively organized and orchestrated in a way that usually shouldn't impact that.

And second, the softer version shouldn't have an impact on the timing of orders.

And the 64K and the 44K high-end appliances are relatively small in terms of their overall revenue impact.

So it shouldn't have that impact.

So no we're not expecting anything.

Okay, great.

And then you had strong growth in Europe as well this quarter again.

Do you think GDPR is driving growth in Europe or is it still too early for that tailwind?

I think GDPR is a very interesting subject and we started talking about it, we started hearing conversations.

At this time, it maybe creates some awareness but I haven't seen yet it changing the sales.

So I think we are at least 6 months to 1 year before that.

Of course the GDPR regulation I think are going in place in May of 2018, if I recall correctly.

So we are still a little bit of time before this kicks in, but companies are starting to get interested.

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

I guess 2 questions, both for Tal.

On the U.S. performance, I know you had some difficult comps there but that business probably grew slower than you've seen in the last few quarters.

Just wondering, is there any difference in the demand trends or anything else happening in the U.S.?

May I remind you that Q4 was a stellar quarter for Americas with a strong double-digit booking, we talked about it.

We don't talk about the booking, but I can tell you that also this quarter double-digit, although both Europe and AMEA was stronger than the U.S. So I'll say maybe just a fluctuation between quarters following a very, very strong Q4.

And then a previous question answered -- or asked about, long-term deferred.

And if I look at that trend, it has been very, very steady, growing 2x to 3x or more faster than short-term deferred.

So there really hasn't been any fluctuation in terms of the trend of long-term growing much faster than short-term.

And I'm wondering therefore, if we could just return to talk about duration and where duration is on contracts?

It does fluctuate, but the reason I can take the credit for it and say look at the 20%, but I know things -- long-term contracts are really affected sometimes by large transactions and large transactions can fluctuate easily between quarters.

And that's why I'm saying also look at the short-term.

So this quarter was very strong in long-term and short-term as well, you see the same with Q4 by the way.

You are right that for the past many quarters it was very strong, but I am realistic to know that there can be fluctuations because you can have transactions of $20 million, $30 million value that can fluctuate between quarters.

So yes, we had a good quarter in long term as well.

We had very large transactions this quarter.

You can see it also in transactions that are larger than $1 million continue to move up, but I'm in my nature just saying what can happen and in general, it can fluctuate.

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

I wondered if -- I'll come back to SandBlast.

Obviously, you said that it is strong, you're talking about both new and existing.

But can we talk about the financial impact as much as we can?

It's being bundled in so -- with initial sales, so it wouldn't be much impact there.

So how is it impacting renewals?

Is it driving up renewal rates, and can you give us some sense maybe about how big an impact it is actually having on billings?

So first, before we break to the financials, I don't know if Tal remembers all the data, but I can say, you can buy despite -- the initial product, but it is not bundled for 3. There's always an option to buy a product with the next-generation for prevention, which is SandBlast, which is the advanced next-generation for prevention, which is 1 layer up.

So let's not given to customers for free, they choose it.

The second year, they can of course decide to renew it or not, and that is an even bigger impact.

And we're also seeing many customers that hadn't purchased a product with SandBlast, a year or 2 years, or 3 years ago, and are now purchasing the SandBlast for the first time with a new subscription to their product.

So I think we're seeing a positive effect from all sets of customers.

I don't have in my head the breakdown between the specific packages, but I think they are doing quite well.

And I'll just say that when you look at the subscription revenue that grew 27%, then a lot of the growth is coming from people moving from the Next Generation Firewall to the Next Generation Threat Prevention, and from Next Generation Threat Prevention to Next Generation Threat Extraction, which is the highest value package.

All of the Next Generation Threat Extraction packages are not bundled as part of the plans' default, it is all of them an option to choose and therefore, all of them are a choice.

You're right that it's bundled together with a few other blades and not only the Threat Emulation in there, but it's real dollars and that's why you see 27% growth in your subscription revenue line.

Can you -- a separate question.

Any comments on the carrier market and the progress there?

We had some nice carrier deals actually in some parts of the world with our expanding, nothing major but I can say that the deals are all quite interesting.

But I don't think that we've seen a big change in shift or the potential expansion which we can still have with the carriers.

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

Gil, just a question for you, and then Tal maybe you can chime in as well.

If you look at just the range of appliances you have, I wonder if you can give us just some color on just pricing and demand trends from sort of the high end to the lower end, anything that you'd call out in Q1 or in your pipeline versus what you saw last year.

I think that varies a lot with product launches, with product introduction and so on.

In Q1, we actually had 2 new models that are not necessarily the biggest model.

One is kind of the midrange, one is the low-end of the appliances, and they both took off very, very nicely.

And overall, in the first quarter that is something notable that I can mention is that the midsize, small to midsize appliances, have done extremely well.

We sold a much higher number of appliances there, won many new customers and that's a very good traction on a segment that we had not necessarily been focused on.

Again, that doesn't change our focus, our focus is still on the midsize to high-end and on the major enterprise market, but we're seeing success in different aspects of the market now.

Our next question comes from the line of Ken Talanian of Evercore ISI.

So first, I was wondering if you could describe how your pipeline looks for the remainder of the year compared to your pipeline this time last year.

I don't think that we generally discuss that or if we disclose that information.

I think as you read from my -- our projection, we are in line with our plans and we are quite optimistic about 2017.

Okay.

And second, given your launch of Check Point Infinity, I was wondering if you could give some insight as to how this might change your go-to-market strategy and specifically, are you reducing SKUs, will you incentivize reps to sell bundles and what if any impact do you expect on your sales cycle?

Right now, I don't think it will have a big effect on any of that.

I think the effect is mainly the customers will see the value of the integrated architecture, buy multiple solutions from us and this is consistent with what we had been doing last year as well.

It's not that we've now started for the first time to promote the link between the cloud mobility and the network security.

I think we give it a better umbrella and a better technical foundation, and that is a good thing.

Now remember, the like -- the big foundation in the management and the integration and so on, evident in R80 and especially R80.10, the new gateway software version that's about to go to market any day now, this is the thing that we've talking about for years.

It is not the softer version of our R80 that went to market last year.

The R80.10 is about to go to market now, but these have been things that we've been promoting for a long time and varied implementation of the new architecture.

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

Tal, a question for you about the guidance for the full year.

I know it embedded some product deferral assumptions as it relates to the new appliances that you're shipping.

But I'm wondering if you can help us understand what proportion of the existing installed base now have the new appliances.

And the reason I'm asking is I just wanted to get a sense of if there is going to be a step function higher product deferral assumption in your guide when the installed base takes on the new appliances?

First, a very, very small portion of our installed base is with the new appliances.

There's the potential for the future, 3, 4, 5 years for the refresh opportunity with the customers.

So in terms of install base, our installed base is massive and typically, it can be 5, 6, 7 years for refresh of customers, so that's a potential for the next few years.

And when it comes to second, the PNLs, once you annualize then you should be pretty much in line.

Obviously it depends on the percentage of the transition.

And regarding that, I can't follow up any more, it's already in the fifth quarter, so it's impossible, that's why embedded in the guidance to start with.

Fair enough.

And I know you've done away with kind of the ala carte blade options and you've kind of moved strictly toward the bundle blades.

Can you remind us what some of the larger Blade presence in the base and maybe quantify what proportion of your entire base has actually adopted, maybe 2 or 3 plus Blades, that's it for me.

So from the Advanced Blade towards the Firewall Blade and the VPN Blade are everyone and our Firewall Blade is used by 100% of VPN Blade is probably by a very high percentage.

For more the more Advanced Blades, the IPS intrusion prevention Blade is the #1.

I think, its adoption rate is more than 50% today.

So it's very high in the marketplace.

And when you talk about mobile and best threat protection, then this is lower, which is -- that's why part of the growth, the main reason for the growth in the subscription, which is the right potential that we have there.

Our next question comes from the line of Jayson Noland of Robert W. Baird.

I guess I wanted to ask on Infinity.

You guys are known for management of the network with the consolidated platform here, including mobile.

Does this help drive and point business?

I know you've had product out there for a long time.

But does this accelerate that part of the market?

I think it does.

I mean, I've seen reenergized interest in our endpoint product.

And again, I think part of it is driven by the management, part of it is driven by the new SandBlast agent that we launched last fall.

And I think SandBlast agent has an amazing set of advanced threat prevention capabilities that I think are the best in the industry in terms of getting forensics, in terms of blocking sophisticated attacks and so on.

So it's a real advanced tool that many customers really like and from what I have heard from customers in our Check Point Experience conference, they really see the nice way of getting all the architecture together.

So in one console received full threat visibility, they can block the incident, they can investigate the incident, and again, all with one system.

Again, I still don't expect us to be a mainstream endpoint vendor in that respective market.

Got it.

Are there any changes to the go-to-market that would help there, it's a different buyer obviously sometimes, and you might be able to accelerate revenue with some go-to-market additions?

Our focus right now is not on the endpoint buyer tradition antivirus.

What I do see is the change in the buyer in the industry in general.

We're seeing that more and more organizations are moving more responsibilities to central security authority and I've seen organizations that for years we sold to the firewall group that was part of the network division and now after many years that group has moved to the security part, to the CISO or a specialty security division.

And that really helps us with the story of consolidation.

And we've already unified the infrastructure, because we can speak to 1 person.

I think even at our conference last week, we saw more CISOs attending than ever before, so I think we are elevating the level, which are going under the organization, and more importantly, these people that before were just consultants or less important, they are becoming more and more important in the buying decisions.

Our next question comes from the line of Keith Bachman of the Bank of Montreal.

I have 2 I wanted to ask, if I could.

The first is on the competitive environment.

Your billings growth the last 2 quarters has improved meaningfully over the last couple of years, and this is one of your highest billings growth quarters in some time.

And yet as we look at one of your primary competitors, even if they make the numbers that they're guiding on The Street, there's been meaningful deceleration with Palo Alto, in particular.

And I just wanted to hear your thoughts on why you're seeing changes in the competitive landscape.

As I said, we reinvested quite a lot in 2015 and 2016, and expanding our focus areas when we talked about the mobility and the advanced threat protection, we start to see the result of these investments.

So for us, it's clear why it's happening to us, and hopefully we'll continue to execute on that.

When you talk about competitors, I think you need to ask them specifically what's going on.

They have less effect.

We see their subscriptions going up or they're going down, I would have said that it was expected as well.

But it depends on your opinions on that and the management.

I think we are seeing with the majority of some of these competitors, that customers are saying we bought their product a year ago, 3 years ago, because it was hot and interesting and now you realize that your products are better.

The uniform answer that I get from many, many customers is that our catch rate and the security level is much better, not to mention the management and the management I think has known for a very long time.

Nobody has thought anything differently, but we are seeing customers that are saying, "Guys, that's not -- again, your security level is simply much higher and that's why we like your product and that is why we switched to your product." That's true for our customers for replacement and our customers that tested some competitive products, or not just tested but actually used them for a while and decided to standardize back on Check Point.

Okay, great.

I will ask my follow-up then if I could.

One of the previous questions was about cloud and pricing, and I realize cloud is typically priced on a different level, that is to say usage, but how do you -- when you're pricing these second, particularly relative to the on-premise solution, how do you think about the pricing deflationary impact associated with pricing on the cloud versus the on-premise world.

It's actually -- the pricing though is quite positive.

In the last few weeks and last few months, I did a lot of learning on how people buy the software on the cloud and what's the pricing model in our industry on the cloud.

Again, remember the pricing models were still in their infancy, it was the beginning.

But right now, we can sell at very competitive prices on the cloud and still make a -- still have a very positive impact on our comparable price.

Now on the cloud, there are 2 models -- 2 major models that people buy.

One is called Bring Your Own License In, in which case they buy a license through the regular channel and so on, and the license can be a similar license to what we are today.

And another one is really purchasing from the app store of Amazon or Microsoft and so on.

In both cases I see the pricing model works quite well.

Remember, that means that most of the transaction will be priced on an annuity on a subscription basis, and not a buy -- a permanent license to start with.

But still the pricing is very -- the comparable pricing is still quite positive to the existing pricing model.

Our next question comes from the line of Erik Suppiger of JMP Securities.

I'm curious in your cloud activity, what are customers doing with -- in particular on AWS.

What are customers doing with the AWS firewall?

Are they using that at all or how do they look at that functionality versus when they use your products?

Is it complementary or do they just not use it at all?

I think it's complementary.

Remember, on every operating system today there is a built in firewall.

On every router there is a built-in basic firewall for the last -- I mean, since before we started.

For more than 25 years on every Linux there is a built-in firewall, and that hasn't changed the behavior of our industry.

Because the requirements from our firewall or an enterprise grade firewall are far, far higher than the built-in packaged into the basic firewall that exists on these products.

And that's by the way today, yes I mentioned them.

A big portion of our installed base user seem to like intrusion prevention and now we're moving to the more full -- to a higher level of advanced threat prevention.

And I think that's the value proposition that we bring today to market.

Now on top of that, add to it the fact that the customer may have the multi-vendor environment, actually triple on the network, on the cloud and even in the cloud, they might use different cloud environments.

They will need things like autoscaling and they will need a centralized management or consistent management.

And not to mention that, especially on the sectors that are concerned about it, they need to stand up with regulations, so they'll need to have the report that says that all their gateways or all their servers are protected with the right level of security.

And I think this is the level of secure -- this is the level of things that we can do that the built-in firewalls don't do.

And again, this is not different than why don't you use the built-in firewall in Linux, which hasn't changed our industry.

There are no further questions over the audio portion of the conference.

I would now like to turn the conference back over to management for closing remarks.

Thanks everybody for joining us today, and we look forward to seeing you during the quarter at the conferences as such.

And we will look forward to hearing from you today on the phone.

Take care and we'll talk to you soon.

Thanks.

This concludes today's conference.

Thank you for your participation.

You may disconnect your lines at this time.