Check Point Software Technologies Ltd (CHKP) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Check Point Software Technologies Second Quarter 2017 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, Michelle.

I'd like to thank you all for joining us today to discuss Check Point's 2017 second quarter financial results.

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

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

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

For your convenience, the conference call replay will be available through July 26.

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 the presentation, Check Point 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 of 1934, include or -- but 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; demands for our products and services; our expectations regarding taxes; and our business and financial outlook, including our guidance for Q3 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 release issued on July 20, 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 Tal Payne for the review of the financial results.

Thank you, Kip, and thank you for everyone joining us today.

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

Revenue for the second quarter increased by 8% to $459 million, towards the high end of our guidance.

And our non-GAAP EPS grew by 16% to $1.26, exceeding the top 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.

Products and Software Blade revenues increased this quarter by 12% over the same quarter last year, reaching $256 million.

We had success in our small and midsize-enterprise product line as we continue to penetrate through the midmarket and new customers.

High end was softer due to lower activity in the financial verticals relating to few large deals that had a tough compare, compared to last year.

Our Software Blades subscription revenues continued to be strong, reaching $118 million and with 27% growth year-over-year.

Our software updates and maintenance revenues reached $202 million, representing 4% growth year-over-year.

Our discount rates remained stable sequentially and even declined slightly year-over-year.

Recurring revenue from subscription and update and maintenance continued to grow and now represents 70% of our business.

Deferred revenues as of June 30, 2017, were $1.065 billion, representing a growth of $173 million or 19% growth over June 30, 2016.

Short-term deferred revenues increased by 15%.

Revenue distribution by geography for the quarter was as follows: 49% of revenues came from Americas; 34% of revenues came from Europe; and the remaining 17% came from Asia Pacific, Japan, Middle East and Africa region.

From a deal size perspective, the number of customers with aggregated transaction value over $1 million was 63 customers this quarter, same as last year.

Transactions greater than $50,000 were 71% of total order value, similar to the second quarter of 2016.

Last year, it was 72%.

Operating margin for the quarter remained steady at 54%.

Our income tax rates for the quarter was 18%, a decrease from the 20% we had last year.

During the quarter, the expected tax regulations in Israel for high tech companies has been adopted.

We expect the effective annual tax rate to be around 17%, as we had previously guided.

GAAP net income for the second quarter of 2017 was $188 million or $1.12 per diluted share, an increase of 18% from the second quarter of 2016.

Non-GAAP net income for the quarter was $212 million or $1.26 per diluted share an increase of 16% year-over-year and above the top end of our guidance.

Our cash balances reached $3,806,000,000 at the end of the quarter.

Our cash from operation for the quarter increased by 10% to $226 million.

Collection continued to be very strong with DSO of 65 days this quarter.

The slight increase in our DSO is a result of a back-end-loaded quarter.

This quarter, we had cash of total of $3.8 billion, as I mentioned before.

We continue to implement our share buyback program during the quarter and repurchased approximately 2.3 million shares for a total cost of $248 million.

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

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

As you just heard from Tal, the results for the second quarter were strong with nice revenue growth of 8% and EPS growth of 16%.

We've been talking about the future of cybersecurity for quite some time and what is driving the threat environment.

It's a combination of several factors.

With the widespread of attacks that are targeting each and every one of us, the attackers have access to sophisticated attack tools, sometimes, the one developed by nation states organization.

Hackers of all sorts are utilizing these methods to create targeted attack, sporadic attacks and large-scale attacks that can shut down entire countries, just like we've seen this quarter.

In the second quarter, we all got a reminder that the future is already here.

The high-profile attacks, WannaCry and NotPetya, have shut down factories, hospital, critical infrastructure and almost the entire country of Ukraine.

These attacks affected the lives of many people around the world and are the combination of all the elements that we've been talking about: Nation state tool used to deploy widespread attacks which resulted in a devastating damage in just seconds.

While this reality is not surprising, many were not prepared for it.

Actually, our data shows that more than 93% of enterprises are not using advanced threat prevention capabilities.

Coverage for newer platforms, like cloud and mobile, is much worse.

Only 1% to 2% of companies are using the advanced security for these platforms.

The Verizon attack last week and the attack on the U.S.A.

voter database demonstrate the lack of security being utilized in the cloud.

Unlike a server in the data center that's maybe protected by perimeter security, a server in the cloud is simply naked at the heart of the Internet.

There are many security companies in our industry, most of which are point solutions that detects and remediates some forms of attack after their first occurrence, and they promote this strategy.

This strategy doesn't work.

The world needs a more holistic approach that will block the next attack.

That's why last quarter, we launched the Check Point Infinity architecture, the first consolidated security platform spanning across network, cloud and mobile.

We executed this vision by combining 3 key elements: One security platform, advanced threat prevention and real-time information sharing.

The Check Point Infinity launch was met with great enthusiasm last quarter, though many of my meetings with chief information security officer also saw this challenge ahead.

This message that the next attack can be prevented and the security can be simple and effective is still ahead of the industry.

We have huge potential to provide disruptive change for the market.

This change has begun, but it is still in the early stages of adoption.

Last quarter, we surveyed customers about their security architecture.

Not surprisingly, the majority of customers still utilize fragmented point solution architecture.

This customer reported that it took them an average of 40 days to detect an attack after it occurred, and the cost of remediation was $668,000.

A single attack.

The average -- the other group, the other smaller group which reported using the consolidated approach reported 2 days for detection and the cost of $6,800 for remediation.

These are the same size organization with the same profile, but the factor in 1:100 in effectiveness proves the importance of the holistic approach.

This holistic approach of the Infinity architecture was introduced last quarter with technologies, such as Anti-Ransomware, an updated version of our key products.

Overall, I believe that we are uniquely positioned in the marketplace and executing well on delivering this new vision for cybersecurity.

As for the business environment, we're seeing a high level of interest and activity in the marketplace, yet we've seen some pockets of softness in important parts of the market.

Specifically, high-end deals had lower activity while midsized deals performed quite well.

Now you all know my usual caveats: The future is hard to predict, and there are many additional factors and challenges that can lead to outperformance or underperformance that must be taken into consideration when we provide our projection.

The third quarter is usually a quarter with a high level of uncertainty, given the summer vacation around the world and the fact that large projects tend to shift to year-end.

This year there is an additional level of uncertainty in our forecast.

The end of the quarter falls on a very special Israeli holiday, Yom Kippur.

During Yom Kippur, the entire country is at a complete shutdown, and we won't be able to operate any business activities.

Given that and the fact that usually a substantial amount of business arrives in the last day, that may result in a significant shift in revenues despite our effort to manage the process.

The amount of revenue we derived in the last few days of the quarter in recent quarter were about -- above $30 million.

The effects on deferred revenue is significantly higher.

We will do our best to process as much as we can to mitigate the effect.

However, we will need to account for some of that in our projection.

So I am quite optimistic about the outlook for the second half.

I'll provide a wider range for the third quarter taking these items into consideration.

So for the third quarter, we expect revenues in the range of $430 million to $465 million and non-GAAP earning per share in the range of $1.18 to $1.28 per share.

GAAP EPS is expected to be approximately $0.15 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 with Cowen and Company.

Okay.

Firstly, regarding WannaCry and NotPetya.

Have you seen, Gil, any change in inquiries or activity levels since these attacks?

Or would you say that it's status quo at this point?

We've actually seen a change in inquiries, and we've got a lot of inquiries for technologies like our SandBlast Agents and the Anti-Ransomware that's included into that.

And we actually got a nice number of POCs and customer inquiries based on that.

Okay.

And then you mentioned a softer business at the high end in financial services this quarter.

Have any of these deals been downsized or gone away?

Also, if you are able to provide an outlook for your financial services business over the remainder of the year, that will be very helpful.

I think the pipeline is quite strong, and we do have some large deals that are waiting to be closed right now.

And I think the main challenge was that the year before there was a very tough comparison because we had some unusually large deals.

But I don't see any -- I mean, I don't see any change in demand or change in behavior there, or not even a big change.

No change in the competitive landscape.

Okay.

And then just lastly, just to clarify because the Q3 guidance is, at the midpoint, quite a bit below where the Street was.

You referenced, of course, the timing of Yom Kippur this year.

But really, my question is getting, again, back to financial services.

Is any of the lower Q3 guide due to any increased near-term uncertainty around closing deals in that vertical?

Or is it purely due to the religious holiday?

No.

It's purely based on Yom Kippur.

Again, for those who've been to Israel, at least in Yom Kippur, you may understand what I mean.

The country's in entire lockdown.

It's something that I don't think you see anywhere else in the world.

There's no cars driving in the street, not -- no shop open, nothing.

It's -- the day is a very, very unique day.

Something that I haven't seen anywhere in the world.

And that's a big challenge.

It's the first time that it's happened, that the last day of the quarter is on that day.

And that means that we won't be able to do any order processing on Yom Kippur.

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

Great.

This is Jackson Ader on for Sterling this morning.

Just had a question regarding Europe.

And what is implied for the European growth rate?

Or I guess not necessarily a specific number, but does Europe have to pick up in terms of demand for the third quarter guidance or for the full year guidance?

I'm not sure I understand the question.

If we look at the guidance in the second half of the year, what kind of performance is the European region kind of baked into for that guidance?

We actually don't provide guidance for specific regions.

So I don't think we can relate to that.

Okay.

Was this quarter more or less back-end-loaded than the $30 million you normally see in the last few days of the quarter than usual?

Same problem.

This quarter was the same.

No difference than other quarters.

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

Gil, question on Infinity.

So Infinity has been selling, as you've said, for about a quarter now.

Still early days.

But do you think Infinity could be appealing more to the installed base or actually to new customers that could be exploring switching to Check Point's comprehensive platform?

I think Infinity can be appealing to both.

Actually, for existing customers, it lets us elevate the level of discussion.

It lets us, say, give them a bigger horizon and a bigger view into the Check Point vision, and I think that's very, very important.

When we speak about new customers, Infinity is a whole game-changer because now we come to them not with product-against-product or deal-against-deal, but we come to them with a new approach to security.

And I think they like it.

I think I've tried it, I've tried this message several times last quarter and on some nice audiences of chief information security officer, and it works very, very well.

I mean, they like the message, they like the vision, it's challenging for them.

And I think that's very good for us.

Got it.

And then maybe Tal or Gil, the high end softness that you've indicated, was it more European or it's actually more U.S.-driven?

I think it's mainly -- I would say vector-driven, right?

So a vertical.

We saw it more in the financial in terms of large deals.

Typically, very large deals come in from the financial industry.

So naturally, it can fluctuate between quarters.

Q2 last year was very strong.

[Growth set] is very, very strong Q4 when it comes to industry, so it was a tough compare.

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

First question is for Gil.

It still goes back to the high end softness.

Given customers' desire to purchase more consolidated solutions, it seems to sort of conflict with this high end softness.

I'm just curious, is -- even those customers speak of this desire, are they for some reason not really trending in this direction?

Or is it really more at the high end, especially, you mentioned financial services, where there's still more -- because they have deeper pockets, still more focused on a best-in-class or best-in-segment versus a consolidated solution?

So first, I've seen the bigger the customer is, the longer sales cycle is.

And by the way, it's much, much harder to do a consolidated sale because in the very highest customers, they have different departments.

It's not like one person making the decision.

There's many, many -- in many cases, in the financial sector, there's hundreds of people in the security staff.

They're divided into different departments and they don't do one large consolidated deal.

So -- but I do -- but we do have a very nice pipeline of that as well.

I think we have -- we don't have a shortage of opportunities right now.

I think overall, in the -- this kind of what people call best-of-breed and so on.

First, I mean, I'm not using that terminology that much because I don't think it's a best-of-breed.

When you compare our technologies in all the key sectors to these stand-alone fragmented products, we score extremely well.

Our threat prevention gets the highest scores of threat prevention compared to most products or all products in the marketplace and definitely the ones that are considered the segment leader.

I don't know if you saw -- in our mobile security, again, a niche market, gets the highest score: 100% attack blocking rate.

And we've seen it in CSO Magazine last month and in few other reviews in that regard.

Just yesterday, there was a PC Magazine review for our Anti-Ransomware technology that just came for the consumer.

It came for enterprises last quarter, and it came for consumers just this week.

And you can see the PC Magazine review.

It says, "Check Point was simply the best.

The only product that blocked on the ransomware." So I don't think that we say best-of-breed is actually the right terminology.

Fragmented, dedicated, maybe, but not best-of-breed.

So I think from that perspective -- now that's by the way a challenge, that we still sometimes need to convince people because some people might think otherwise.

And I think we're doing quite a good job in showing that our security capabilities in the key areas are the best in the industry.

Okay, okay.

And if I might, a quick follow-up for Tal.

Tal, you said that discount rates were down year-over-year.

I'm curious, is that due more to reduced competitive issues?

Or is it since you sell largely in U.S. dollars, was it more a function of sort of stability in foreign exchange rates where you just didn't have to discount in regions that are non-denominated in U.S. dollar?

So I can first just relate to fact.

The rest is speculation, right?

Just like when it moved up, I had, like, 2 or 3 type of answers because you don't really know one specific reason.

But I know that we are monitoring very closely the discounts.

If you remember last year -- I'm talking specifically about the update and maintenance, when we saw, last year, an increase in the discount and we've monitored it and we -- you try to manage it as much as you can.

Obviously, it's much more complicated, like you said.

You have currency devaluation that effect it and many other factors.

And the more bundling you have, the more you have a discounting request.

So in general, we say we're looking very, very closely in the discount.

And we succeeded to stabilize it and even slightly moving down.

So I will call it a stable discount environment.

Currency, I don't think it made a big shift this quarter.

There were a few percentage of change against the euro and the pound, but it was like tenths of percentage.

It was a single-digit change.

So maybe it's relating to that.

But I don't -- I think it was just a well-managed, good environment in general.

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

Just a question for the team about the high-end deals that you talked about here in Q2 that slipped out of the quarter.

Wondering if you could give us a sense of how those have trended here in Q3.

Have some of those started to close Q3?

Or is this something that's going to take a little bit longer to resolve, where we actually have to wait for Q4?

So first, we had some fluctuations between year-over-year because, as Tal mentioned, in 2016, we had a huge number of large deals both in the second quarter and even more so in the fourth quarter.

And these deals tend to fluctuate between quarter-to-quarter.

We do -- or our sales team does expect to close some deals that will leap from Q2 to Q3 in July, and they already started doing so.

So I think it's -- so again, we've checked our forecast and the sales confidence in the third quarter, and the sales team has actually a pretty healthy forecast for their third quarter.

If I would just...

Got it.

And then just -- sorry, go ahead.

I just wanted to explain.

We talked about the fluctuation and less deals than last year.

I didn't say that it slipped to Q3.

Got it.

Thanks for the clarification there.

And also, Tal, just a question on just the timing of the holidays with deferred revenue.

Obviously, Gil talked about the impact on revenue and earnings.

How should we think about any sort of the balance sheet items and any impact there?

Of course.

We've got -- of course, what you see in the revenues is it's significantly higher than deferred revenues, you understand.

Because what Gil was relating to, that he said that the effect on the revenue when you look at the last few quarters, that it's more than $30 million.

Obviously, we're taking steps to mitigate it, and that's why you can see our guidance is not taking into account above $30 million reduction in the revenue.

When you look at the balance sheet, then the orders that we relate to update, maintenance, subscription, although they will come, you can't book them, right?

So that will affect more the deferred revenues, and therefore, I would not check the implied booking next quarter.

Our next question comes from the line of Anne Meisner with Susquehanna Financial Group.

Yes.

Quick question on the newer appliances.

Those have now been in the market for over a year with the greater blade bundles.

Could you share with us what you're seeing in terms of the annual renewals on those blades?

And any observations you can share on renewal rates of those relative to how they might compare to prior generations?

Yes.

I would say -- remember, we don't provide -- the absolute number has not much meaning because people can jump or change from package to package.

Typically, they're moving from a lower package to a higher.

We started with Next Generation Firewall.

Many of them moved to Next Generation Threat Prevention.

Now we are working on moving more and more into Next Generation Threat Extraction that includes many of the advanced technologies.

So that's a general comment.

In terms of the percentage, we see the same rates of renewal and an even slight increase when you look at the second year.

Okay, perfect.

And then, Tal, could you just share a bit more detail on the linearity you observed in the quarter?

In the prepared comments, you mentioned that business seemed a little bit more back-end-loaded, driving the higher DSO.

Was there any sort of pause in the sales cycle as a result of the ransomware attacks?

Because we know that kept security teams at enterprises pretty busy this quarter.

Is that something you might have observed that could have contributed?

It was a minor change, right?

So I can't read if that's why they brought the orders in the beginning of June versus the end of May.

Really, you understand?

That's the main change.

If you get slightly less in May and slightly more in June, that's the effect of the DSO.

When I'm checking the DSO in the last month, it's exactly the same for the last 5 years, running between 34 to 35 days.

So we have very, very strong collection.

We don't have any collection delays.

It's pretty strong.

You can see it in the very strong cash flow that we have.

So I wouldn't read too much into it, no.

Nothing dramatic.

But I mean, it is correct that some people, speculators, say that, like, when your house is on fire, you're not busy closing deals.

And I think some of it may be evident.

Even though you can expect what were the security risks and where cyber attacks like we've seen are there, people will rush to buy.

Actually, I think in many cases, people are slowing down the activities then thinking over their purchasing plans.

Our next question comes from the line of Saket Kalia with Barclays.

Maybe first for you, Gil.

You spent some time in your prepared remarks kind of talking about how some parts of the market are maybe lagging on the consolidated security approach.

I guess the question is, did you see any change in attach rates of blade packages?

Or any sort of mix shift from higher-end blade packages to perhaps lower ones?

Actually, the other way around.

We are seeing a constant shift to attaching a broader set of blades.

By the way, even when -- wherever things are bundled, people take the bigger bundle.

Wherever things are unbundled, people buy more of the high-end blade packages.

And I think that's a very, very good phenomena that we are seeing consistently in the last few quarters.

So people are adopting the new technologies.

People do understand the value.

Again, it takes time.

Not by the way, everybody that purchase it automatically or immediately activates that.

So I think we are working hard to get people to use that and to get the benefit of what they should have in their installed base.

And especially on the large customers, they are large, so it takes time.

But they are buying much bigger packages, and that's a very good phenomenon in terms of getting our world a more safer place.

Got it.

Got it.

And then just for my follow-up just for you, Tal.

I guess, the question is, are you seeing any sort of trade-down effects with the latest appliances?

Inasmuch -- or we're about a year into the latest appliance family.

And I guess just given the strength in midrange and maybe softer result in high end.

I know we've said it's vertical-specific, but just to cover our bases, do you feel confident that there isn't a trade-down effect that's happening?

It's a good question.

It's -- I mean -- and I analyze it a lot, but we see the number of units increase significantly.

It's again another quarter of double-digit growth in the number of units.

So mathematically, you can say, "Well, high end went slightly down." And remember, when you talk about the high end, it's not tens of thousands of units.

So the shift can be a dollar effect definitely, though when you analyze all the data points, that yes, you see less units in the high end and much more units in the lower and the mid-end of the market.

So there might be some trade-over.

Remember, it's not the same customers, so it's very hard to say factually, "Well, this customer that had the high end, now he buys mid-end." Every quarter, it's a different customer.

So mathematically, you see theoretical trade-down.

But when you look at the deals, we see that we just had less large deals with this quarter.

So that's, I think, my feeling, that it's more relating to that than a trade-down.

But a trade-down can be another theoretical explanation.

I have actually one example when we came up with a new model that supposed to be priced lower but with very high performance.

And we did see a lot of units move to that model.

The interesting fact is that the ASP hasn't changed.

So actually, it was a good change that people bought the lower end model, yet the price that we got from it, after discounts and after all of that, was identical.

So that was actually a good sign of no trade-down in that specific model.

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

Yes.

Two questions.

One, did GDPR play a role at all in terms of either increasing demand?

Or did it create any pause?

And secondly, in light of your guidance reflecting the Yom Kippur, how should we think of the outlook for Q4?

Should we be bringing down the revenues for the year?

Or would we expect that the business that would be delayed in the -- at the end of the quarter would just increase the revenues in Q4?

So GDPR does create a little interest, and people are interested in that.

And we have, I think, some nice articles and some nice material about securing the GDPR.

I don't know that right now, it's driving a lot of deals.

And I think in many cases, all of Europe where GDPR is the new standard and the new rule starting in 2018, I think it slows down business a little bit, not accelerate it, at this point.

Even though I think it is a very good driver for future understanding that companies need to put more security and secure their infrastructure even more.

So I think in the long term, it's a positive phenomena on our business.

And as for the guidance, we kept the guidance the same for the year.

So naturally, what we took down is expected to be part of Q4 as those booking will be recorded in the beginning of Q4, the time that we'll put the booking in the system.

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

Two questions.

One, I just want to take another shot at the big deal softness.

I know that there's the tough comp that you've pointed out and there is obviously some lumpiness.

But is there something, anything fundamental that you can identify in that softness this quarter in terms of real economic driver for that?

No, I don't think that there's anything fundamental in the business.

I think the business is good.

The sales force is working on many accounts and many deals.

And I think long term, there is no change in the business environment.

And the second question has to do with the guidance for next quarter.

At the -- first of all, I just want to specify.

It's $30 million, I think you said, impact typically from 1 day or several days.

Now that $30 million in the shortfall to consensus guidance, is that all going to hit on the product line?

Is there any reason we should think that maintenance and subscription could take some kind of a hit as well?

Okay.

Two clarification.

We didn't say $30 million, we said above $30 million, just to make sure.

Second is, majority, 99% of it to 98%, majority naturally will come on product line because when subscription and update and maintenance booking come, you won't see it in deferred revenues.

The effect on the revenues -- there is an effect on the revenues, but it's a smaller part of that amount.

So majority by far of that amount is from the product line.

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

Does the Yom Kippur effect this quarter, it -- does it affect more your production or your sales?

And if it's your sales, maybe you can talk about your exposure -- your revenue exposure to Israel.

It doesn't change anything in the sales.

The salespeople are active all over the world.

It does affect our ability to record the sales and the logistics part of supplying the products.

You have to realize that we get the order.

We usually -- the orders are back-end loaded and we get many of the orders in the last couple of days.

We process them immediately, and in many cases, we ship them immediately.

That part is done all -- not entirely, but almost entirely, out of our headquarters in Tel Aviv.

Okay.

All right.

And the other question I have is, your deferred revenue, you said it was, I think, much higher than $30 million the last few days of the quarter.

Is that correct?

Yes.

Yes, absolutely.

Okay.

Can you give us an idea how much higher it was than the $30 million?

Because the -- I note that the deferred revenue total was $1.065 billion, which was below consensus of $1.08 billion.

And so I just want an idea what it would be even if you didn't get that push at the end from deferred.

No.

We're actually talking about the next quarter, not this quarter.

So when you talk about revenues and obviously product booking, majority of them, the minute you get the booking, you deliver and it goes to the revenue.

That's why it creates that reduction in the product, to Michael comments from before.

When it comes to a subscription and update and maintenance, then when you get the booking and a lot of it's coming in the last day and in the last 2 days, then that typically is being invoiced and going to the deferred revenue.

And it's significantly more than the $30 million.

And to Michael's comment, just -- because I don't think to answer to Michael regarding the range, we didn't drop the guidance in $30 million.

The range is $30 million or $35 million, but the drop from the midpoint expected before to the new midpoint is much less.

It's more around $13 million, $14 million, $15 million, $16 million, right?

So we didn't take into account the full hit.

We're assuming that we can mitigate some of it.

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

So first off, I was wondering if you could give us a sense for how far along you are in the refresh of the midmarket customer base.

That's a very good question, but I don't know that I have an answer to that.

I think that we can refresh and we can sell many more to many more customers.

I don't think that we're necessary in a refresh.

We're -- especially the midmarket, by the way.

In the midmarket, we had a lot of customers.

It's a very active market and with markets with a lot of untapped potential.

And I will say also, naturally majority of our install base is still on the older appliances, right?

We launched the new appliances only mid last year.

Our install base is significant, so there's still majority of the install base is not refreshed at all.

We say overall, we refreshed from last year, again, just in order of magnitude, 10%, 15% of our install base.

If I just look at the amount of appliances we sold last year compared to the -- not the old -- not the historical install base but even the active install base.

That's helpful.

And also another question around the high end.

How does the softness that you're seeing in financial vertical impact your ability to grow areas like SandBlast?

I think we have plenty of potential to grow SandBlast in the financial or in other sectors.

Again, I think we have a very good pipeline, very good acceptance.

If you read the -- if you see the enthusiasm from SandBlast and if you see the reviews for SandBlast, all the parts of SandBlast, the network part, the mobile part, the agent part, there is very, very good reviews from NSS, from the press, from every -- are pretty good.

So I think we created here a really good brand in terms of the ability to deliver the highest level of advanced threat prevention, and I think a lot of potential moving forward.

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

Maybe 1 for Tal, 1 for Gil.

Tal, your maintenance revenue growth rate upticked a little bit to 4% from a little bit lower in the prior quarter.

So is this a function of the increased discounting anniversarying now?

Is that what's going on?

Maybe there's another explanation.

I think it's relating to the fact that we have strong bookings for the last 2 or 3 quarters when it comes to all the line items and the decline also helps a bit.

But we -- I think we executing well.

And the update and maintenance over the last few quarters -- and remember, the revenues, it takes a few quarters to start to recognize.

We saw a decline, which we worked.

So it's part of really what you said, the anniversary of that decline -- of that increase of -- that we saw last year in the discount.

And this quarter, it's even slightly moved down.

But the slight move down in the discount rate this quarter probably didn't even affect yet the revenues in that regard because it takes 4 quarters to get it into the revenues.

So I will say it's a growth of stabilization of the discount and good renewal rates.

Got it.

Okay, that's helpful.

And then maybe, Gil, this could be a tough question to answer, but would you expect other Israeli-based technology companies to be citing this holiday issue on upcoming calls?

Or is there anything unique about the way that Check Point takes and fulfills orders that would make the impact on you guys a little bit greater?

I don't know enough about other companies.

I'll tell you what's unique about us.

We are one of the only companies that actually delivers product and delivers product almost off the shelf directly to the customer.

So it doesn't take us time to win a deal, to customize the product, to prepare it and to ship it.

And therefore, the effect -- I don't think that necessarily, we're more back-end-loaded, but we ship the products that we get -- the orders that we get very fast because we are a product business.

When I look at the other large Israeli companies, most of them are not in the same business model.

Most of them are not product shipment, in that kind of business.

Most of them have slightly different business models.

Our next question comes from the line of James Fish with Piper Jaffray.

First, can -- maybe Tal first.

Can you talk about what blades you saw strength in this quarter?

And if the ranking order you have given in the past has changed in any way?

I understood the first part of the question, what strength -- what blade we saw strength.

And what was the second part?

You typically have given, like, a ranking order of sort of the top 5 blades.

And so I'm just curious if that's changed at all.

So just so you know, since -- historically, we used to sell blades stand-alone, so there was a ranking of the blades.

Now we have -- majority is actually buy in packages, which goes in line with Gil's comment that the market consolidation is happening over time.

We started with Next Generation Firewall that has a certain package, and then we moved the Next Generation Threat Prevention.

I will say majority of the customers moved to Next Generation Threat Prevention.

And since last year, we see more and more customers going to the higher package, which we call Next Generation Threat Extraction, which in it, you have the SandBlast, the advanced threat protection.

So we see more and more customers adopting that.

I'll remind you, this is our focus area, try to make customers, make sure they're protected by it -- adopting the advanced threat protection technologies.

In them is the SandBlast which protect them.

So we see a very nice success there.

Got it.

And then maybe for Gil.

Gil, can you maybe talk about what type of demand you saw in the quarter and sort of recent weeks related to customers securing their cloud environments?

I think we see a high level of interest in the cloud.

Yet, I think the cloud, in many cases, is kind of out of control of the general IT and the general security department.

And I think that's the big challenge of the cloud.

I see it almost in every business.

By the way, the large businesses that we cater to and that we work with, most of them -- all of them are using the cloud.

Almost all of them are using it in the niche areas and not inside their core infrastructure.

So I think the level of interest in cloud security is high.

The revenues that we're deriving from that is okay, but it's still very low compared to the future potential that there is.

Our next question comes from the line of Keith Weiss with Morgan Stanley.

This is Hamza Fodderwala in for Keith Weiss.

I just wanted to focus on the operating expense side for a second.

We noticed that OpEx growth was about 7% this quarter, which is the slowest it's been for some time, actually since 2014 according to my calculation.

Is this sort of a pullback from the higher investment posture that you guys have been making in recent quarters?

And should we expect this OpEx growth to sustain?

I think we are actually -- we do have today a very large number of open position in all parts of the company, from R&D to sales.

I think what we've seen in the first half of the year is that some cases, some reorgs in some areas.

We are putting more emphasis on selling advanced technologies.

We are putting more emphasis on selling new customers.

We have been doing some changes in the sales organization, and that resulted in some people leaving, many people joining.

And today, we have a very large number of open positions.

Okay.

And then maybe one follow-up, if I may.

I noticed that based on the Tal's commentary earlier in the call, that Europe or EMEA grew about 2% to 3% this quarter.

I don't know if I missed this earlier, but was that due to any softness that you saw specific to that region?

I think in Europe, we saw a very -- it depends -- it's a very mixed environment, depending on the different countries.

I don't think there's one behavior.

We've seen countries that have done very well.

We've seen countries that were a little bit on the weaker side.

For competitive reasons and others, I'd rather not give country-by-country numbers.

But I will connect it to one of you asked about where were the financial large deals.

And I said, "It's in the vertical, not in the regions." So obviously, some of them were in Europe, yes.

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

I wanted to ask about the product revenues.

As you look out over the next period of quarters, is there a notion of transitioning your product revenues from an initial sale transaction model to more of a subscription model?

And if so, what might the implications be to that?

So first, there is absolutely -- we do have that trend, and you can see it from this year to last year, the subscription part of our -- for our new technologies, not the maintenance, is actually growing quite nicely.

And you see it's a bigger and bigger percentage.

And I think that's a very, very good phenomena that we turn our business into annuity.

And not only that, we focus on selling the advanced technologies as the core and core of our offerings.

So...

Yes, sorry, I was referring more to the product and even the appliance level.

Is there a notion of moving that more toward the subscription?

Taking that, call it, kind of mid-30s kind of revenue model and moving even more so the subscription side of the base products?

We do have some ideas around that.

But generally, when we sell a product, it is a product.

Again, what's in the product itself is -- when we say we -- actually, let's say, we sell an appliance today for $10,000, 5 years ago, almost all the $10,000 were product revenue.

Today, big part of this $10,000 is going into subscription because we bundled with the appliance a lot of the advanced security packages.

So we break down from a revenue recognition standpoint between the 2 buckets.

Long term, there's more and more into the subscription and annuity part.

Okay.

Just the second question I wanted to ask is more in the SaaS environment, within the context of the SaaS world.

What are you seeing your opportunities or challenges in SaaS situations to sell your securities portfolios?

I think there's a little bit of potential in SaaS.

For example, we came up this year with the SandBlast for the Office 365 cloud environment, which is clearly a SaaS implementation of securing the SaaS e-mail environment.

There are more ideas like that, but most of the SaaS environment is still a closed environment, and the ability to sell security for that environment are fairly limited.

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

I just wanted to understand a little bit better.

What type of impact are you seeing from Infinity in terms of your win rates?

I think it just started, so I can't say what it says -- what it's doing in terms of win rate.

I think, in terms of opening doors, in terms of getting higher-level attention in the organization, I think we're getting a very good acceptance on that.

Wherever customers love the idea and want us to give them a broader set, and that's most of the reactions that we are getting.

Or even when customers are challenging our approach, it's a very -- most cases, it's an excellent opportunity because we move from the tactical discussion of this product is better than that product and this appliance is faster than the other product than the other appliance, to the strategic discussion about how to build security, how to give a total security.

And I think that positions us in a completely different way and gets us much broader opportunity in each customer.

So I'm very pleased with the reaction that I've got so far.

Got it.

And then you said that maybe you were a little bit ahead of the market in terms of Infinity.

So I mean, what does it take to sort of catch up?

And what type of time frame do you think there will be before it has a little bit more of an impact?

I can't say what.

I mean, again, I think right now, we are using it on almost every customer -- I mean that we're in the process of educating our people, our channel partners, everyone about the value of Infinity, about bringing up Infinity on every deal, about presenting it to every customer.

I think we are seeing it as a major door opener.

It's a major area for discussion.

And we also have some good ideas about how to create more business around it and not just have that as an architecture and product sale as product.

And so how to bridge these 2 together.

And I think overall, it will have a very good impact.

And our final question comes from the line of Ben Bollin with Cleveland Research.

When you look at your overall business, can you discuss the revenue opportunity across the segments?

Should a customer go from a 100% prem-based private data center deployment to a full cloud model?

Specifically, how do you look at the lifetime value of that customer in the different scenarios?

And how does the revenue mix look across your different segments from one to the other?

And then I have a follow-up.

I think right now, the majority of our revenues are from the customer data center, from the on-premise things.

Most of the large customers, by the way, that's where most of their data centers are.

They are using cloud as a new ancillary technologies, not as the core data center yet.

I think long term, I still don't know how this business model will looks like.

Clearly, it has a lot of potential to expand to the cloud, to mobile, to other areas, but they are -- but it is right now in its very early steps.

And then as a follow-up, do you see any particular geographies or types of customers, verticals for instance, who are more willing to embrace cloud-first strategies versus prem-based deployments?

Nothing in particular.

We have some -- again, we have some customers from all over the world, from all different sectors, from all different segments of the market.

So I don't know that I can say that it's specifically to one or the other sector.

I think the benefit which we bring to all these environments is the fact that customers can manage their entire security estate and their entire security policy from one console using one enterprise policy and get control over that.

And that's something that's today, really, really missing in the cloud.

I think customers are fighting today to get hold of what they actually have in the cloud before they even start to secure that.

Thank you.

There are no further questions at this time.

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

Thanks, everybody, for attending the call today.

We look forward during the quarter to seeing you at conferences and also addressing any questions you might have on calls.

Have a great day, and we'll see you throughout the quarter.

Bye-bye.

This concludes today's teleconference.

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Thank you for your participation, and have a wonderful day.