Check Point Software Technologies Ltd (CHKP) 0 Q0 法說會逐字稿

Greetings and welcome to the Check Point Software Technologies fourth-quarter and fiscal year 2013 conference call.

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

(Operator Instructions).

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

Thank you, sir.

You may now begin.

Thank you, Jess.

Good day everyone.

I would like to thank all of you for joining us today to discuss Check Point's financial results for the fourth-quarter and full-year of 2013.

Joining me on the call today are Gil Shwed, Founder, Chairman and CEO, along with our Chief Financial Officer, Tal Payne.

As a reminder, this call is being webcast live on our website and is being 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 February 4. If you would like to reach us after the call, please contact investor relations by emailing kip@checkpoint.com or by phone at 650-628-2040.

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

During the course of this call, Check Point representatives will make certain forward-looking statements.

These forward-looking statements may include our expectations regarding the introduction of new products and programs and the success of those products and programs.

Our expectations regarding capital expenditures and our expectations regarding our business and financial outlook including with respect to the effective tax rate and currency rate data rate fluctuations.

Other statements which may be made in response to questions which refer to our beliefs, plans, expectations or intentions are also forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934.

Because these statements pertain to future events, they are subject to various risks and uncertainties and actual results could differ materially from Check Point's current expectations and beliefs.

Factors that could cause or contribute to such differences include but are not limited to the risks discussed in Check Point's latest annual reports on Form 20F.

As a reminder, Check Point assumes no obligation to update its forward-looking statements except as required by law.

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

With that I would like to turn the call over to Check Point's Chief Financial Officer, Tal Payne, for a review of the financial results.

Thank you, Kip.

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

I'm happy once again to begin the review of a great quarter.

Our revenues for the fourth quarter increased by 5% year-over-year with a 19% sequential increase in deferred revenues.

Non-GAAP EPS grew 8% to $0.98 at the top of our guidance.

Before I proceed further into the numbers, let me remind you that the fourth-quarter and full-year 2013 GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets, the related tax effect, the impact of tax settlements with the Israeli Tax Authorities.

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

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

In the fourth quarter of 2013, our revenues reached $387.1 million compared to $368.6 million in the fourth quarter of last year representing an increase of 5%.

Revenues were toward the high end of our guidance.

Product revenues returned to growth this quarter increasing by 4% to $156.2 million compared to $150.9 million last year.

The growth was driven mainly by the success of our data center products, the 13500, the 21000 family and the super high-end 61000.

Our software update maintenance subscription revenues reached $230.9 million representing a growth of 6% year-over-year.

The growth was driven mainly by our annuity software blades that are recognized as subscription.

We continued to see great success in our annuity blades led by our threat prevention blades and application control.

Software blades revenues increased by 28% year-over-year and are now 25% of our service revenues.

Deferred revenues as of December 31, 2013 were excellent at $671.6 million, an increase of $81.9 million or 14% over December 31, 2012.

Sequentially the deferred revenues increased by 19%.

Revenue distribution by geography for the quarter was as follows.

The Americas contributed 47% of revenues; Europe contributed 37%; and Asia-Pacific, Japan, Middle East and Africa region contributed the remaining 16%.

From a deal side and quantity perspective this quarter, transactions greater than $50,000 accounted for 72% of total order value compared to 67% in the same period a year ago.

We had 75 customers with transactions greater than $1 million compared to 62 customers in the same period last year.

Our non-GAAP operating margin this quarter continued to be strong at 59%.

We continue to increase our headcount mainly in sales, R&D and technical support.

In addition, we were slightly affected by the changes in the dollar exchange rate against some currencies around the world.

Our GAAP effective tax rate for the fourth quarter was 13% versus 21% in the fourth quarter of last year.

During the quarter, we reached a settlement with the Israeli Tax Authorities with respect to the release of all [trap] profits and a settlement of tax disputes relating to prior tax years.

The settlement was paid in two payments.

The first payment in the fourth quarter of 2013, this quarter, and the second payment in the first quarter of 2014.

The Company had sufficient provisions in the book to cover the settlement hence the net effect on our P&L was a positive income of $15 million.

The effect was eliminated in our non-GAAP tax expenses therefore, our non-GAAP tax effective tax rate for the fourth quarter was 19%, in line with the previous quarter.

For next year, the Israeli regular corporate tax rates will increase from 25% to 26.5% and the preferred tax rate from 12.5% to 16%.

As a result, we expect our effective tax rate to increase slightly in 2014 and to be between 20% to 21%.

GAAP net income for the fourth quarter of 2013 increased to $194.1 million from $174 million in the fourth quarter last year.

GAAP EPS increased to $0.99 from $0.85 per diluted share in the same period last year representing 16% growth year-over-year.

Non-GAAP net income for the fourth quarter was $192 million or $0.98 per diluted share, up from $185.1 million or $0.91 per diluted share in the same period last year.

Non-GAAP earnings per share were at the top of our guidance representing 8% growth year-over-year.

Our cash from operations this quarter were $58.2 million.

Net of the tax payment for the settlement with the Israeli Tax Authorities, our operating cash flow increased by 13% to $228 million from $202 million last year.

Collections continue to be very strong and our DSO was 69 days, similar to the previous quarter.

During the quarter, we purchased approximately 2.2 6 million shares for a total amount of $135 million.

Now let's take a look at the 2013 year highlights.

For the year ended December 31, 2013, revenues were $1.39 billion, an increase of 4% compared to $1.34 billion last year.

Non-GAAP EPS for 2013 was $3.43 an increase of 8% compared to $3.19 in 2012.

On the operating side, we achieved a non-GAAP operating margin of 58% for the year.

As a reminder over 40% of our expenses are in local currencies other than the US dollar.

In 2013, the dollar weakened against our main local currency.

Based on the current exchange rates, we expect 2014 expenses to increase approximately $5 million compared to 2013.

For the year, cash flow from operations excluding the net tax payment for settlements in prior years has reached a record of $862 million, an increase of 6% compared to last year.

Our cash balance reached $3.630 billion at the end of the year.

In 2013, we repurchased approximately 10 million shares in an aggregated amount of $538 million which represent an average repurchase per quarter of $135 million.

We believe that our market leadership and long-term growth prospects make this an effective time to further utilize our cash and increase shareholder value.

As such, we have announced today an updated plan effective immediately to repurchase up to $200 million a quarter up to an aggregated amount of $1 billion.

The quarterly amounts may vary.

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

Thank you, Tal.

I would like to thank everyone for joining us on the call today.

I'm very excited with this quarter's results.

This was a spectacular quarter.

We outperformed our goals and delivered sales results that are reflected in our customer wins and deferred revenues that we haven't seen for more than a decade.

We have seen strength in many areas.

From a product perspective, our data center appliances performed extremely well led by our new 21700 appliances and the 13500 which was launched just in Q3.

Our 61000 super high-end appliances also had a record quarter.

Software blades continued to perform very well with growth accelerating in the fourth quarter.

Much of it comes from our next-generation threat prevention software blades package.

We continue to focus on expanding the depth and breadth of our security technologies with additional software blades.

In 2013, we launched the Threat Emulation software blade which is powered by our cloud service.

The Threat Emulation blade discovers new threats that are not discoverable by other existing technology.

This is accomplished by opening incoming files in a secure environment and analyzing their behavior automatically.

Earlier in the year, we launched a new generation of our small business and branch office appliances.

The 600 and 1100 Series appliance received amazing review from Industry Observer and have been enthusiastically embraced by customers.

This has resulted in a very strong growth trajectory since their launch in Q2.

We have also delivered our latest release of software, the R77 during the year and just now the R77.10 update.

This version includes more than 50 product announcements including the new Treat cloud Emulation service, Check Point HyperSpect performance enhancing technologies, Check Point compliance software blade, the mobility of virtualization amongst others.

We continue to develop and introduce new and innovative threat prevention solutions.

In addition we continue to expand our offering in the data and mobility area.

We believe that cyber threats and mobility are two of the most important areas in security these days and we intend to provide leading technologies in these areas to keep enterprises secure worldwide.

This brings me to the financial outlook.

You know my regular caveat.

It is always hard to predict the future.

There are many factors that should weight in the increased need for cyber security is an important factor yet at the same time, the economy (inaudible) to a more conservative approach.

As always we take a realistic approach which has risks in it as well as potential of upside.

For 2014, we expect revenues in the range of $1.440 billion to $1.5 billion and non-GAAP earnings per share in the range of $3.50 to $3.70 per share.

GAAP EPS is expected to be approximately $0.32 less.

For the first quarter, we expect revenues in the range of $330 million to $350 million and non-GAAP earnings per share in the range of $0.79 to $0.86 per share.

GAAP EPS is expected to be approximately $0.08 less.

I just want to repeat again the guidance for the year.

The revenues are expected to be in the range of $1.450 billion to $1.5 billion and the non-GAAP earnings per share in the range of $3.50 to $3.70 per share.

Thank you.

I would like to open the call for your questions.

(Operator Instructions).

Gregg Moskowitz, Cowen and Company.

Thank you very much and congratulations on a return to product revenue growth and a strong bookings performance.

Looking at some of the deal metrics, the deal sizes over $50,000, the deals that were over $1 million, that clearly went up into the right and it sounded as though data center appliances are taking more hold.

What I am wondering is if this is in your view more of a seasonal uptick where that might revert in 2014 or if you think there is some sort of change or shift in the buying behavior from customers?

I think it is hard to predict the future.

Clearly I think that not all of it reflected in the numbers.

We had a very good Q4.

I think some of it is attributable to the fact that we have worked throughout the year and delivered amazing wins.

I hope this is a good sign for the year to come.

We just has our sales kickoff meeting in Europe and in the US last week and this week and I think the overall atmosphere is quite positive.

On the same time, I don't want to be overly optimistic and I think we are not changing yet our guidance or predictions beyond the overall rates that we have seen throughout last year.

Okay, thanks, Gil.

I realize it is somewhat early but with Threat Emulation, what trends are you seeing so for in terms of deployment?

For instance, is it more enterprise or midmarket and also which verticals or geographies are moving forward thus far?

I think it is too early to say.

I think in terms of sectors we have seen all sectors have seen relatively high-end customers deploying it so far and I have seen all sectors again manufacturing.

I mean everything -- I mean all of the different companies but again I believe it is too early.

Unfortunately it takes the market from my perspective too long to ramp up and after a quarter and a half, it is still too early to give statistics that will be meaningful.

I would just add that if you remember we launched the Anti-Bot somewhere in the middle of last year and -- 2012 -- and I mean we have seen it in the last three quarters really increasing nicely and already crossing a few million of dollars a quarter so it takes some time to start to see results of the new technologies.

Okay, thank you.

If I could just ask one more either of Gil or Tal.

So 2014 is already shaping up to be an acquisitive year in security.

I am just wondering if you can update us on your thoughts of the M&A landscape and whether Check Point might look to move forward with an acquisition this year?

Thank you.

We do look forward for that and we think we are investing more resources now than ever in finding the right target.

It is not easy to find the right companies.

There are many interesting companies and many interesting technologies.

Very few of them fit well to our portfolio and fit well to scaling into a very large number of customers.

I am very proud however in what we already have.

If we look at our new technologies and our ability to deliver innovative technologies, that is a huge room for growth to get our customers to deploy.

I mean look at our Anti-Bot technology.

Many hot start-ups in the cyber space are hardly delivering what we are delivering with the Anti-Bot.

The Threat Emulation that we have shapes up to be very high quality.

We just ran some benchmarks and got amazing results when we tried to do some really advanced comparable testing against some of the most known and other competing offers from others and our results were really, really much better.

I think in the next few weeks we will probably publish some of that.

So I think that beyond, yes, I would like to acquire some companies and we are looking at that heavily.

On the same time, I think we have a lot of potential by reaching more of our customers with our own technologies that are already in the marketplace.

Okay, thank you very much.

Michael Turits, Raymond James.

Can you make a couple of comments on thoughts on expenses going into the year?

Obviously we can back into it somewhat from your EPS guide but you mentioned something about the FX impact.

Can you walk through what you think the FX impact on expenses will be and also where you might be investing more from an operating perspective as well?

Sure.

So first, we spoke about it already from the middle of the year that we continue to invest and invest more in sales, R&D and technical support.

You already see it in Q4 some of the effect.

So that is like regular ordinary course of business.

In terms of the dollar, it has already affected us already in 2013 and in more a minor way and when I am looking at the current rate for the dollar against the currencies that are relevant to us then I said it is approximately $5 million effect on our expenses on 2014.

So that is like $0.02, $0.03 or so that is the effect of the dollar.

And then the taxes if you remember last quarter I told you the taxes should move up in about 3%.

The good news is now I'm saying it will move up in about 1%.

So that is the two updates that I gave this quarter regarding next year.

So tax should be around 20%, 21%.

The dollar effect is at $0.03 or so so far based on the current rates.

I don't know what will happen with the rates.

If they improve, it will improve our situation and if it will deteriorate, then it will increase our expenses.

Okay.

If I get a fundamental follow-up just, can you talk a little bit about your entrance into incremental markets to an extent both the SMB market and the carrier market which you have talked about a little bit in the past?

I think we are in these markets but I think we have a lot more potential in both of them and we are investing a lot more in them.

We started a new sales organization for the SMB market and we are doing all the right work now to start it and give dedicated people that will focus just on the right distributors and resellers for SMB and give them the right attention.

We are assigning more executives to the telco space so we will have the right level of relationship with the accounts on a worldwide basis and I think I see a lot of potential in both of them.

We had some success with the 61,000 in the fourth quarter that is reflective of that and clearly I think we are seeing some already early success with the low end 600 series and 1100 series at the low end of the market.

Thanks, Gil.

Thanks very much, Tal.

Sterling Auty, JPMorgan.

Thanks.

So on the products side, the strength in the data center, can you walk us through how much of that is upgrade replacement sales of units and how much of it might actually be greenfield as enterprises or other might be building out additional data center capacity?

So usually a lot of our sales are coming from our existing customers be it refresh or selling upsell expansion of networks.

The SMB unit that we talked about, the 600 and the 1100, many of them are new opportunities with existing customers that are putting us also in the remote location and only in the head office, that is one comment.

Second, we see quite a lot of new wins in the competitive environment that we are replacing our competitors.

Okay.

I want to touch upon the share repurchase so at 200 million in the quarter, it seems like you are barely spending more than the cash flow that you just generated in 2013.

I thought the opportunity in the tax program in terms of the settlement was going to give you a preferential rate to actually do something incremental with the cash on the balance sheet.

At this rate you are not actually taking down the cash balance at all and with $3.6 billion, that seems much more than what would be needed for any particular acquisitions that you might be doing.

Why not do something even more incremental like maybe even a one-time share repurchase for 500 million or 1 billion on top of what you just announced?

Sure.

So I'll remind a few basic things that are leading us in those decisions.

Number one goal for our cash is to enable future growth of the Company and M&A.

So we haven't seen M&A in the past, we might see in the future.

As you can see actually from valuations in the market over time the valuations are going up and you need more cash to be able to have M&A assuming it is fitting to the Company's strategy and future growth.

So that is the number one goal for our cash.

Number two, which is in line with our behavior since 2003, we would like to bring back shareholder value through buybacks/dividends.

The majority of our shareholders prefer buyback.

That is why we continue with buyback.

We move from 200 million to 300 million to 0.5 billion and now up to 800 million a year which is quite a significant increase.

It is pretty much in line with the operating cash flow you are right and we think that it is the appropriate use of cash for the Company.

Okay.

Maybe last one to slip in.

You mentioned the 600 Series and the work in the branch office and also into the midmarket.

Do you feel that effort is fully staffed at this point or is there additional investments that you plan to make in 2014 to broaden it out?

Definitely not fully staffed right now.

We intend to hire many people to strengthen it.

I think we can do more and I think we plan to hire a lot of people to help.

Okay, thank you.

Aaron Schwartz, Jefferies.

Thank you very much and congratulations on the results.

I just had a question on the guidance to play devil's advocate here.

If you look at the deferred revenue growth here over the last 12 months it was very strong about just under 14%.

Can you just help me reconcile that with your topline growth expectations for 2014?

It seems like with the growth there, the re-acceleration in the deferred growth over the last 12 months that potentially you could see some more are topline growth over the next 12 months or is this just a conservative outlook at this stage in the year?

I guess I would say you are absolutely right that the growth in the deferred is much faster.

So yes, it was much faster and it is not like it is for the next 20 years, it is for next year.

You can see the difference between short-term and long-term.

Having said that, Q4 is typically the strongest quarter of the year so we think we should be prudent and provide the guidance that we believe is realistic which means it is not the best scenario and not the worst scenario.

And I think we are modeling this quite right so we are not sandbagging or anything unrealistic here.

I do like to think and I hope more than anyone on the call that there is upside to what we are doing but at this point I can only say that what we have done is based on very, very realistic models and there is no sandbagging or hidden reserves out there.

Okay.

If I could ask a second question, you talked quite a bit about the strength in the data center area and the higher end products.

You also had strong deal metrics with million dollar plus transaction.

Presumably that is -- or they are correlated with the higher-end products contributing some of the larger deal flow there.

The question I have is given the sequential strength in deferred here, are you seeing I guess higher revenue deferral rates on your data center products or your larger product sales?

Is that contributing to the seasonality in deferred as aligned with the larger deal flow?

Thanks.

Not really.

The majority by far like almost all of them out of the deferred revenue is relating to updated maintenance and subscription for the software blade.

And the software blades revenue (multiple speakers) not the subscription for the software.

Meaning it is not the appliances, the appliances once they are delivered, they are recognized and they (multiple speakers).

Still I mean in a bigger portion of the appliances is in blades.

When we sell an appliance, the appliance includes in its several blades and I think over time we have seen a slightly higher percentage of the appliance price in the software blade which means that it is going to the deferred revenues but it is not a huge amount.

I guess that is what I was getting at though, the 21 or the 13 -- the higher-end series the blade revenue allocation on those sales is slightly higher than maybe the lower-end boxes and that is something deferred revenue here with the large deal metrics in Q4?

Theoretically but it is like remember, it is like probably between 10% to 15% of the appliance value.

So some quarters can be 12%, some quarters can be 4% -- 14% and you are right, it is based depends which appliance is pulled more so it can change every quarter.

Okay, thank you.

Daniel Ives, FBR Capital Markets.

Thanks.

There was obviously a resurgence of growth here.

How much do you think is related to product cycle maybe channel execution versus secular just in terms of strong security growth?

That is my first question.

I don't know how to answer that.

I think we have had a good pipeline in the fourth quarter.

A lot of it was generated throughout the year and I think we have outperformed even our own pipeline in the fourth quarter.

I don't think that is there is anything too cyclical around that.

I think that it is maybe things that are more [midyear] and back-end loaded.

It may be just I think good competitive wins.

I think from -- during the quarter we had both examples but I don't know how to measure them.

Okay.

Then in terms of M&A, is there more of a sense now that you would be willing to maybe pay out [print] acquisition now that you have been very disciplined from a valuation perspective?

But in terms of M&A, is there a little bit of different mindset going into 2014 just given that now growth looks pretty consistent in terms of the core business and you guys now obviously have more cash in some countries?

I think in an M&A perspective, we are looking for the right opportunity.

Clearly the valuations are not low but the main thing is something that will give us either great technology that we really want or nice growth which will complement our portfolio.

I think what we have learned throughout the years is that we need to we need to find very good synergy with our customers and with our product line and just acquiring technology because it is good or because it carries a nice revenue but without the real synergies doesn't work for us.

But again, we are looking in a wide range and we may surprise ourselves, not what I expect but I'm looking at it in a very open way not that we have any complicated formula that nothing fits.

Okay.

Thanks.

Great quarter.

Brad Zelnick, Macquarie.

Thank you very much and nice quarter, guys.

Gil, how do you think about your need to be on the endpoint especially in light of FireEye buying Mandiant.

Does that change your thinking at all?

I don't think that changes much.

I think we are actually looking today on the endpoint and I think we want to take different approaches to the endpoint.

I think the endpoint per se market and the huge market where 90% of a market is antivirus, that is a different market and I think our focus shouldn't be on that.

I think we have other ideas on what we can do on endpoint.

It can be small agents that connect to our cloud service which is something we are starting to launch with (inaudible), a very soft launch but something that we are starting to do.

It can be something -- my direction would be looking more at the data securities side on lightweight agents and to provide more security to endpoint through the clouds.

This is the general direction as I look at endpoint.

Thanks, Gil.

Just a quick follow-up for Tal, you might have mentioned this already and I might have missed it but the cash payments to the Israeli Tax Authority in the press release it talked about there being a follow-on payment in Q1.

Just for our models, can you tell us how much you expect that will be?

Thanks.

Slightly over $100 million.

Thank you very much.

Keith Weiss, Morgan Stanley.

Excellent.

Nice quarter guys and thank you for taking the question.

Following on some of those large deal metrics with 72% of revenues from deals over $50,000 and the good deal metrics deals over $1 million, can we take that to more broadly talk about increasing ASPs across the board or was that just more of a barbell effect with large deals?

I believe -- Tal can correct me because she knows better the number, what I have seen is a slight increase in ASP, not a big increase in ASP, but we do see larger deals which means more products per deal and more products per customer.

I would just add that remember that the software blade initiative that started in 2009 is very successful which means existing customers are purchasing more products from us.

So the total cost of a true (inaudible) with the customer increased.

So while ASP can stay the same or slightly increase or slightly decrease, this depends on which appliance they chose whatever software blade they put on the Bot is a material part of the ASP of the long-term of the customer.

So you see software blade is very successful.

It is already 25% of our updated maintenance and subscription line; 25% is quite a lot.

It is a quarter which means it is very successful therefore the deals from the customer as a whole is increasing.

So software blades are increasing ASPs but slightly increasing ASPs?

It is not ASPs.

It is the size of the transaction (multiple speakers) we are having with the customer.

It depends how you measure it.

The ASP we usually measure on the first time buy and on the cost of the appliance.

We had the year that it was going down, actually this year it went up so that is a good feel.

On top of that, the following year the customer is going to buy more subscription and more the software blade, more software blades to renew the software blade or just buying brand-new software blades.

So the total customer value is going up and I think at the end of the day if we look at how many dollars the customer has spent with us three years ago versus now, the numbers clearly went up and maybe even went up significantly as a result of the software blades.

Got it.

Excellent.

And then I was hoping maybe you could talk a little bit more broadly about the competitive environment, the changes that we saw in 2013 and how you are thinking about it in 2014 as there was some significant M&A in this space with Cisco buying Sourcefire.

Like a previous caller said, you saw FireEye buying Mandiant.

FireEye has definitely come up in a lot more conversations and has been seeing some pretty good growth.

How do you think of the competitive environment going into 2014?

Do you see it as significantly changed?

I don't know if it changed.

I think clearly 2013 was interesting but I haven't personally a lot of changes as it relates to us.

I think the FireEye, not just the FireEye acquisition but the FireEye IPO clearly shows that there is a lot of potential in the fighting threat.

We see some of it and you can see some of it in our software blade line.

The software blade, a huge portion of it, the majority of the portion, it is fighting new types of threats and it is bigger than the FireEye business.

FireEye clearly demonstrates even within niche markets of sub segments there is a big potential and I think we need to show to the markets that we have very good technologies in that space and we do.

We came up with that in the middle of the year and I think the competitive benchmarks that we have are showing amazing results and once we publish that in the coming week, I will be happy to share it and I think it is very, very good signs for us.

We still have a lot of work and I don't think it is trivial to market it to our customers and that is a challenge we always have.

Excellent.

If I could sneak one last one in.

It sounds like you are talking a lot about investments on this call probably a little bit more so than we have heard on prior calls.

Is part of that like you are saying -- do you guys have really good technology in-house that competes with some of the more louder names in this space let's say and you are looking to market those a little bit more aggressively in the year ahead?

Absolutely.

I think it is a correct assessment.

Excellent.

Thank you very much for the time, guys.

Matt Hedberg, RBC Capital Markets.

Great.

Thanks for taking my questions.

In terms of application control, it sounds like it was an important component of 4Q components and I guess with the largest application library in the industry and competitive price points, is there a way to think about how penetrated your installed base is with application control?

It is actually quite early.

I think number one blade in terms of penetration is IPS and then application control and then a lot of them [single] sided like antivirus, anti-spam, (inaudible) and so on.

But it is still out of our installed base, it is probably in the low tens of percentage so there is still a huge potential there.

That is great.

Then as a follow-up, identity theft has been obviously all over the headlines recently and Gil in the prepared remarks, you talked about data and mobility as a key focus for Check Point.

I guess in your minds, why are all these breaches taking place?

Is it really as an industry?

Is it a technology issue, a security management issue?

And are you seeing increased demand based on these breaches and the breadth of your portfolio?

First, I think the recent attack which we have seen are very sophisticated attacks.

For example, usually traditionally you might say an enterprise should protect its database or its data center.

The last huge attack that we have seen on the US -- and I won't name names here -- but it didn't happen on the main databases, it happened on POS machines in branch offices which actually strengthen the need for a company to have a unified and a global strategy for its security and not just point products or even good technologies protecting its headquarters.

I think what we are seeing from the hacker's perspective is clearly smarter hackers doing sophisticated attacks.

This is not just a small Trojan horse or a worm that screams I'm here and cause some damage.

This is multistage attacks with a collection of data with integration of system, with taking data back and so on and I think there are good answers to that.

But I think it takes customers -- let's put it that way -- it takes our industry more time than we would like to provide the technological solution but it is probably taking our customers much more time to deploy the technology or require the technology than we would like.

Unfortunately what I see is that for customers to deploy a new technology it takes between a year to three years and I think the hackers don't really give us the leeway.

They don't wait for a year to three years until they use the new attacks.

They are developing new attacks every day.

Thanks.

Great color.

Thanks, guys.

Robert Owens, Pacific Crest.

Thank you very much.

Tal, you talked about a $5 million hit in 2014 due to FX.

Can you remind us what the impact was in 2013?

I think it was slightly less, a few millions of dollars.

Remember that we had a hedge also last year so the net effect was slightly less, probably $2 million, $3 million and for next year obviously, we are probably going to hedge next year like 2014 as well but the hedge is already from a low number.

So based on the current rate, it is around $5 million effect, net effect.

On this (inaudible) it was significantly more but some other currencies reduced it slightly so the net is around $5 million, $6 million.

I would add one thing, Tal, to the calculation, but unfortunately the effect so far is cumulative.

So basically if I look at the effect on the last two or three years probably getting close to $0.10 a share just from the currency effect.

Then on the product revenue side, it has been flat for two years I think on an annual basis but you have seen some momentum with new products.

How should we think about product revenue growth in 2014 in the context of I think about 6% growth in the midpoint of the range?

So we didn't provide the split but I think for now a good assumption is a even split between the two, between products and updated maintenance.

Remember one thing that we have done maybe a bad service to ourselves and confused even ourself, we have (inaudible) the accounting rules.

The fact that as many of our products come in the form of a software blade and they are listed under the services line in the P&L, that is something that is accounting and that is something that I mean in reality, we are selling more technology, more new technology as part of our product and not all the credit goes to the product line.

Sure and the blades were impressive I think at 28% but if I back that out, can you help me understand why the services growth is roughly flat to up 1% year-over-year, the service and maintenance component?

For the reason that you mentioned, product was flat and if the product excluding software blades is not growing, which is what happened in the last year and a half, then you don't get a new subscription and if you don't get a new subscription, also the updates in maintenance is flat.

All right.

Thanks, guys.

Tal Liani, Bank of America Merrill Lynch.

Most of my questions were asked.

I just want to ask you about dividends and the potential for dividends going forward.

I think we are very open to the subject and you see that we are increasing our buyback program to the whole issue of shareholder return.

I think from serving our shareholders or you guys and basically the vast majority of investors would like a share buyback and that is why we are increasing the share buyback.

Personally by the way, I am very open to dividends and I am really reflecting here the perspective not of myself but of the feedback we are getting from our large shareholder.

The second question is about the bookings.

I just I'm trying to understand bookings were up very nicely the last two quarters, revenues are kind of climbing behind.

When you look at the composition of bookings, is it a lot about the services that will be recognized in a ratable way or should these bookings translate into just delayed recognitions of products and blades, etc.

so that means what you report is products should accelerate over time?

It is actually relating to the line of the update maintenance and subscription line but bear in mind by the way the reason we don't disclose bookings because remember it can fluctuate between quarters.

So one quarter it can be very high and another quarter can be slightly lower and none of them should create over panic or over excitement.

We had the quarters that the deferred didn't move and I told you it is okay because we got the booking the quarter before.

I am not saying that is the case now, we had a very strong quarter.

You can see very clearly in the deferred and you can see both the short-term and the long-term deferred revenues increased nicely.

But bookings can sometimes be timing.

So I think your question -- revenues for the majority of the deferred revenues is going to the update maintenance and subscription line.

Got it.

Thank you.

Karl Keirstead, Deutsche Bank.

Tal, a question for you.

Last quarter you indicated that the combination of product licenses and the annuity blades summed to about 8% growth.

I liked that metric.

If I calculate it for this quarter it feels like it was about 9%.

So I have two questions.

First of all, do you think that that high single-digit growth for the combination of those two items can continue near-term?

And secondly, what is your latest thinking around breaking out the annuity blade line so we can see it more clearly in the reported numbers?

Thanks.

I will start with the end.

It is already going to be broken up in this 20-F.

So next year it's going to come broken already, that is one.

In the 20-F you will have the breakdown obviously for the last few years.

When it comes to that metric I agree with you because it is relating to what Gil just said that if we take the product including the blade which is from our perspective we sell a product, we just sell it in the subscription, then the growth of the product is significantly higher than what you see in the P&L.

Absolutely.

And you will be able to see it from future reports.

You will be able to see the recognition in future reports (multiple speakers) the actual product sale may be even higher.

Got it.

Thank you.

Gray Powell, Wells Fargo.

Thanks for taking the questions.

I just wanted to make sure I understood the software blade commentary correctly.

You said it grew 28% year-over-year, was that in Q4 or full-year 2013?

And then how should we think about the growth in software blades in 2014 within the context of guidance?

We didn't provide the breakdown but it is probably going to decelerate slightly as it decelerates every year since you have a lot of renewals coming from past years.

The 28% was relating to Q4 versus Q4.

The rate was [quitely] accelerated in the fourth quarter compared to the previous three quarters.

So it was 28% Q4 versus Q4 and I think we covered your question.

Thanks.

Just one more if I may.

You mentioned endpoints and cloud services.

Should we expect you to introduce more of an anti-malware solution into your endpoint product set at some point?

I wouldn't like to call it that way but yes, we will have more anti-malware capability on our endpoint and some of it may be carried through cloud services and not all through like a big heavy client.

Understood.

Okay, thank you very much.

Phil Winslow, Credit Suisse.

Thanks, guys.

Most of my questions have been answered but I just wanted to touch on geography.

Obviously you guys saw stable growth in the US and then obviously you with everybody else saw a deterioration in APAC.

Gil, when you look forward at your pipeline for Q1 and for 2014, I wondered if you could just give us some comments about what you are seeing geographically and just sort of what your expectations are?

I don't think I have something too much in particular.

Last quarter I think the US was great, Europe was also very good, Europe was even particularly strong on the product sales which is the best sign.

For 2014, I think I would model for our salesforce to be quite balanced between the different regions.

Got it.

And then also just, Gil, you made a comment on just remote office, branch office.

Just wondering if you can comment about what you are seeing there.

Obviously you talked about your small and midsize business initiatives but sort of in that Robo Market, what does Check Point have to offer there?

I think the new 600 Series that we have is an amazing product and I think the review of it came out when we introduced the shows that the product is hands-down winner in the category.

And I think there is much more potential for us to gain mindshare of the resellers and the customers which are buying other solutions.

But the 600 Series is an amazing solution.

We have a scalable architecture so you don't have to end up with that you can also grow to the higher end product.

Again some of our cloud services are great complementary things to small and midsized businesses because they don't require them.

Actually when we see high-end businesses they like to build their own private cloud and not to use external cloud for security analysis.

The small business, they cannot afford putting expensive equipment and our cloud services are a great solution for that so I see a great potential to that on the same time it will take us a long time to build that pipeline and convert the channels from other offers to our appliances.

I would just say that so far since we launched the 600 and the 1100 in Q2, every quarter Q2, Q3, Q4 we see tens of percentage of increase both in the dollars and in the units.

Still unfortunately, still small compared to the potential of that market.

Got it.

Thanks.

Walter Pritchard, Citigroup.

Tal, just a quick question for you on the cash available.

I just wanted to confirm with these Israeli tax settlements out of the way, is all of your cash flow generated available to buy back all of the $3.6 billion on the balance sheet available to return if -- understanding you're not necessarily announcing that but are there any other restrictions on the cash?

I will try to give the short answer.

The new cash is free.

About $2 billion out of the rest of the balance is free and the rest of it is free -- but because it is not coming from profit but actually from advances from customer deferred revenues, equity and so on, so that is a reduction of capital and it is a legal process.

It is not about the tax of Israel, (multiple speakers) It is about other types of flows.

But from the tax flows in Israel now all of that is free.

Got it.

And then just, Gil, a question for you.

There has been some building excitement from some investors around the potential for a pickup in firewall refresh activity during 2014.

I am wondering what you see -- you have one of the largest installed bases out there in terms of gateways -- I am wondering what you are modeling and customer history tells you about what 2014 look like in terms of firewall refresh?

I think some of firewall data also shows a lot of potential.

I think we are not modeling a lot of that because in previous years we haven't seen a lot of potential refreshes necessarily translated into same timing that it was expected.

Great.

Thank you very much.

(multiple speakers) Series that we acquired from Nokia, it is a good time for them to refresh right now.

Great, thank you.

Brent Thill, UBS.

Gil, I just wanted to follow-up on Walter's question.

When you talk about that refresh, if you know you saw the last refresh four or five years back and if you have an average life of a firewall of three to five years, why would you not see a refresh going into 2014 given the time series of the lifecycle plus the technology shifts and everyone else in the industry is talking about this, why wouldn't you see that?

I would say the following.

First, of course we see refresh.

We see every year so if you assume that the lifecycle for a customer is five, six, seven years, theoretically every year you should see 15%, 20% theoretically over your install base.

Now in good economic years, sometimes there's acceleration and in bad economic years, sometimes deceleration.

So the question do we see?

Of course we see.

A lot of our sales are refresh.

In terms of the exact number, then A, it is very hard to know how long the customer will take.

Some of them will choose seven years, some of them will take only three years.

Secondly, remember that we went into appliances only in a big way really when we acquired also Nokia which is 2009.

So we don't have the historical data of when the customer purchased his latest appliance unless he purchased it from us and that is basically from 2009.

So over the years, we have more and more data relating to the original date of the hardware appliance of the customer.

So over time we see more and more of that exact date that he purchased the appliance not the software that is on.

So I think that is what Gil was relating to.

Tal, can you just walk through last year -- if you broke out your new customer growth versus existing customer growth, is there a metric or a direction you can tell us in terms of how that new customer growth is tracking?

Remember we are dominant in the market.

We are leaders in that so we have hundreds of thousands of units installed out there so the number is obviously for us it is a fraction comparing to a new customer that are just coming into the game.

So for them, the majority of their customers are new but for us the majority is existing customers.

Software blade, a lot of this is new not customers but new products so to existing customers and some of them also to new customers.

We have thousands of new customers every year but (multiple speakers)

We have thousands of new customers every year and some of them are small, some of them are very large.

We have seen deals north of $1 million with our new customers usually for a new customer it takes time to ramp up our strategy.

By the way, not to the deal that it was but most of our customers we like to purchase and feel comfortable and do more but we are seeing a nice increase in new customers.

Great.

Thank you.

Thank you guys for joining us.

Before I leave, I just want to make sure everybody got guidance correctly.

For the year, it is $1.45 billion to $1.5 billion and the non-GAAP earnings per share is $3.50 to $3.70 for the year.

And GAAP EPS is expected to be approximately $0.32 less on the quarter.

We are expecting $330 million to $350 million with $0.79 to $0.86 with GAAP being $0.08 less.

And with that I would like to say thank you for joining us today and we look forward to seeing you guys through the quarter.

Thanks.

Thank you very much.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time.