Kip Meintzer Tal Payne - Chief Financial Officer Gil Shwed - Co-Founder, Executive Chairman and Chief Executive Officer

Sterling P. Auty - JP Morgan Chase & Co, Research Division Shaul Eyal - Oppenheimer & Co.

Inc., Research Division Michael Turits - Raymond James & Associates, Inc., Research Division Brad A. Zelnick - Macquarie Research Rob D.

Owens - Pacific Crest Securities, Inc., Research Division Walter H. Pritchard - Citigroup Inc, Research Division Aaron Schwartz - Jefferies & Company, Inc., Research Division Tal Liani - BofA Merrill Lynch, Research Division Shebly Seyrafi - FBN Securities, Inc., Research Division Gregg Moskowitz - Cowen and Company, LLC, Research Division Daniel H.

Ives - FBR Capital Markets & Co., Research Division Philip Winslow - Crédit Suisse AG, Research Division Richard G. Sherlund - Nomura Securities Co.

Ltd., Research Division Robert P. Breza - RBC Capital Markets, LLC, Research Division Jonathan Ho - William Blair & Company L.L.C., Research Division Brent Thill - UBS Investment Bank, Research Division

Thank you, Jessie. I'd like to thank all of you for joining us today to discuss Check Point's financial results for the first quarter of 2013.

Joining me on the call 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 April 29.

If you'd like to reach us after the call, please contact Investor Relations by e-mailing [email protected] or by phone at +1 (650) 628-2040. Before we begin with management's presentation, I'd like to highlight the following items: During the call course of the call, Check Point's representatives will make certain forward-looking statements.

These forward-looking statements may include our expectations regarding demand for our security products, our expectations regarding the introduction of new products, programs and success of those products and programs, and our expectations regarding our business and financial outlook for the second quarter of 2013. 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 27A of the Securities Act of 1933 and the Section 21E 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 report on Form 20-F.

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 on our website, 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.

Now, I'd 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, and hello, everyone. I would like to thank all for joining us today for a review of the first quarter of 2013.

Our revenues for the first quarter increased to $323 million, and non-GAAP EPS was $0.79, representing a 7% growth over the same period last year. Revenues were in the lower half of our guidance, while EPS was toward the high end of our guidance.

Before I proceed further into the numbers, let me remind you that our first quarter GAAP financial results include noncash equity-based compensation charges, amortization of acquired intangible assets and the related tax effects. Keep in mind that non-GAAP information is presented excluding these items.

Now let's take a look at the financial highlights for the quarter. In the first quarter, revenues reached $322.7 million, representing an increase of 3% compared to $313 million in the first quarter of 2012.

Our software updates, maintenance and subscription revenues reached $216 million, representing a growth of 7% year-over-year. The growth was driven by our update and maintenance revenues, as well as our software annuity blades that are recognized as subscription.

We continued to see great success in our annuity blades led by our threat prevention blades, including application control, antivirus, URL filtering and Anti-Bot. Software blades revenues increased over 25% year-over-year.

Products and license revenues were $107 million, a decrease of 3% compared to the $110 million in the first quarter of 2012. Our super high-end appliances, which are sold in small quantities, can fluctuate between quarters.

This quarter, there was a $5 million decrease in a handful of super high-end deals compared to the same period last year. As for the main enterprise products, while number of units reduced following a very strong double-digit growth in Q1 last year, average sales price increased and offset most of that effect.

Deferred revenues as of March 31, 2013, were $586.4 million, an increase of $44.1 million or 8% over March 31, 2012. Revenue distribution by geography for the quarter was as follows: Americas contributed 45% of revenues; Europe was 38%; and Asia Pacific, Japan, Middle East and Africa regions contributed the remaining 17%.

From a deal size and quantity perspective, this quarter, we saw an increasing number of larger deals. Transactions greater than $50,000 accounted for 67% of stock and order value compared to 60% in the same period last year.

We had 43 customers that each had transactions with a value greater than $1 million, compared to 34 in the same period last year. Our GAAP operating income was $177 million in the first quarter of 2013 with 55% margin, the same as the operating margin in the first quarter of last year.

Our non-GAAP operating margin this quarter continues to be strong with 59%. GAAP net income for the first quarter of 2013 increased to $148 million from $143.6 million in the same period last year.

GAAP earnings per share increased to $0.73 from $0.68 per diluted share in the same period last year. Non-GAAP net income for the quarter was $159.3 million or $0.79 per diluted share, up from $156.9 million or $0.74 per diluted share in the same period a year ago.

Non-GAAP earnings per share was toward the high end of our guidance, representing 7% growth year-over-year. Our cash balances reached $3,523,000,000 at the end of the quarter.

Our cash from operations this quarter was $331.4 million, an increase of 20% from $275 million in the first quarter a year ago. This quarter, we received a net refund from the tax authorities for previous years in the amount of $55 million.

Our DSO is at 78 days, an increase from the first quarter of 2012, as the quarter was back-end loaded. Our monthly DSO remained at the same levels as last year.

During the quarter, we repurchased approximately 2.64 million shares for a total cost of $131.6 million. Now let's turn the call over to Gil for his thoughts on the first quarter.

Thank you, Tal. I would like to thank everyone for joining us on the call today.

Tal has already addressed the financial results. Now I would like to share some further information with you [Audio Gap] product.

As you will recall, we spoke about our intentions to raise the bar for security and provide additional layers of security during the last quarter. We followed up on both intentions with the introduction of 2 new software blades, Threat Emulation and Compliance.

Threat Emulation is an exciting blade which addresses the very fast-growing segment of the marketplace. First [Technical Difficulty]

Hello, this is Kip Meintzer. Sorry about that, apparently we had a disconnection.

So I'm going to turn it over to Gil here to start now.

Hi, everyone, and sorry about the interruption. I'll resume right at the beginning.

As I mentioned, Tal has already addressed the financial results. Now I would like to share some further information with you regarding the business and our products.

As you will recall, we spoke about our intention to continue to raise the bar for security and provide additional layer of security during the last quarter. To followed up both these intentions with the introduction of 2 new software blades, Threat Emulation and Compliance.

Threat Emulation is an exciting blade, which addresses a very fast-growing segment of the marketplace. First, Threat Emulation prevents infection from undiscovered exploits, zero-day and targeted attacks.

This innovative solution quickly inspects suspicious documents by emulating how they run to discover malicious behavior and prevent malware from entering the network. Check Point Threat Emulation also immediately reports new threats to our ThreatCloud service and automatically shares the new information with other customers.

The Threat Emulation Software Blade further utilizes our cloud architecture and can be deployed as a cloud server with no capital investment or as an on-premise appliance. The second solution we announced is the Check Point Compliance Software Blade, which is designed to alleviate enterprise-wide reach by translating thousands of complex regulatory requirements into security best practices.

The new compliance solution constantly monitors policy configuration on Check Point software blades to provide actionable recommendations with over 250 security best practices. We've also introduced new appliances.

We expanded our performance in the data center at the very high end with the 21700 appliance, 50% [indiscernible] 110 gigabits per second compared to the performance of the 21000 series a year ago. In addition, we launched a new family of appliances targeted at the lower end of the market, enterprise branch and remote offices.

With this new series, the 1100 series, customers can benefit from the Software Blade Architecture in a small form factor at a price point that starts under $1,000. A testimony to our market leadership was delivered in the latest report from Gartner, IDC and NSS Labs.

According to IDC Worldwide 2012 Security Appliance Tracker, Check Point is recognized as the #1 vendor in the worldwide firewall and UTM appliance market, with the largest market share increase amongst all vendors. We also received a great recognition for our product leadership in the NSS Labs benchmark sheet, producing the highest marks for next-generation firewall and for IPS.

This further demonstrates our commitment and leadership in providing the best security to our customers. This leadership, coupled with new security innovations like our Anti-Bot and Threat Emulation software blades, continue to raise the bar for security in our industry.

From a business and geographical perspective, Europe produced good results, while our soft spot was in a handful of super high-end deals in North America. From a customer perspective, we just held our annual customer and partner conference, Check Point Experience, in Barcelona.

This year, we had a very high level of attendance and interest in the conference and we received very good ratings from the participants. This week, we are going to hold our U.S.

conference in Washington D.C., and we expect record level of attendance and hope this level of interest will be reflected in future weeks. This brings me to the financial outlook.

You know my regular caveats. It's always hard to predict the future; there are many factors that should weigh in.

Specifically, for the second quarter, we had a healthy forecast from our sales force, yet we've seen softness in a few markets in the first quarter and have taken that into consideration. Therefore, we will have a larger-than-usual range for this quarter.

For the second quarter, we expect revenues in the range of $320 million to $350 million and non-GAAP earnings per share in the range of $0.76 to $0.84 per share. GAAP EPS is expected to be approximately $0.08 less.

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. Thank you, and sorry for the interruption earlier.

On the couple of deals you mentioned, the super high end, can you talk specifically -- were those service provider-related deals similar to the softness that was seen by the FIs and the Fortinets, or were they enterprise deals?

They were mainly enterprise deals, and they were mainly a tough compare to last year because last year, we had some 1 or 2 exceptionally large deals that we won. And this year, we actually have a nice pipeline that can also work for that, but these will tend to shift and fluctuate between quarters.

And unfortunately, that's the main change in product sales this quarter compared to Q1 last year. Competitive-related, no, I don't think that any of these deals -- I mean, all these deals that there are now are still open, and I think that, that part of the market is currently not very competitive to keep the deals we are seeing.

Okay. And then I think the other topic that everyone's been asking about the last couple of quarters is the timing or potential of return to growth for the product and license revenue line.

Given the growth in revenue plus change in deferred in the guidance outlook, how should we think about the product and license revenue line for the June quarter? Should it be flat, down or up year-over-year?

I think we provided a wide range, so it can be any of the above. I think that we are looking for a resumption of growth in that line, and I think it's expected more towards the second half of the year and the last part of the year.

Keep in mind that most of our new innovation and new security technologies are software blades that are accounted in the services allowance because they are annuity revenue. And the software blades are actually growing very nicely in quantity, in revenues, in all the right measures.

And this quarter, I think Tal spoke about 25% increase in software blades revenues and I think that's pretty consistent for, actually, for the last few quarters. So I think a lot of the new innovation and the new products and technologies that we are launching are falling in a different line on the P&L but help a little bit the growth.

Tal, quick question for you on some of the comments you made. I think you indicated, obviously, that the super high-end appliances came short $5 million but however, the ASP has increased on the smaller OEB [ph] SMB appliances.

Is that a metric you'll be starting kind of to disclose and share with us on a quarterly basis? And again, kind of what was the cause of the softness?

Was it just kind of seasonality or just the tough year-over-year compares?

Just to clarify, when we say super high-end, it basically means relating to the 61,070. And as you know, it's only a 1.5-year product.

It typically sells a few units. It's not hundreds of units.

Therefore, if you have 5 or 6 deals, in the second quarter, you get 4, and in another quarter, you get 8 deals, that's the difference. And Q1 last year was very, very strong.

If you remember, we reported that was the first quarter that it was 8 digits. So $5 million out of it was quite significant in the total product booking, based in 1 or 2 transactions.

So I wouldn't read too much into that except for the fact that we sold less super high-end deals, that's it. And when it comes to the rest of the appliances, there are 2 things we sell.

We sell -- remember, or I'll just remind you that in Q1 last year, our number of units increased over 20%. So that was a very tough compare going into Q1, and we see a decreasing number of units while we see a very healthy growth in the ASP, which compensated for that decrease.

And a question on the deferred revenue. Obviously, strong metric this quarter.

What was it driven by? Was it just kind of renewal products, services, what's in there?

I think it's the software blades, there's more services, I think all contributed to the deferred revenues.

Deferred revenues, mainly, remember, the majority of that number is the update and maintenance, which we had good renewals. We keep our steady renewal rate as it was for many years, so we have great renewal rates.

And the software blades continue to increase that as well. So that's the main 2 factors.

First, I think you said, Gil, that you saw some softness in the market that was causing you to give the wide range. Anything more specific you can talk about that, and especially how you might be thinking about the full year guide?

I know it's early, but you didn't give an update on that. And I have a follow-up.

I think we feel now [ph] that several companies that have published results and seen some weakness in the first quarter. I think from our perspective, as I said, we're seeing nice growth in the European market for the past 2 quarters.

In the U.S., I think we had a mixed picture. In some places, we had great success and we've sold many deals, specifically to the small number of super high-end deals, that has been the main shortage.

And again, our sales force right now is quite optimistic, and we have a very strong forecast. Yet at the same time, I would like to balance that with what we're seeing here around us in the marketplace and with other companies.

So that's why we're providing the wide range, and I think it's very realistic.

Okay. Sort of the -- and any thoughts on where you are in terms of the full year guide, any change to that range at this point?

We couldn't hear you. Could you repeat the question?

Yes. Any change on your thoughts on the full year guidance range that you gave last quarter at this point?

I think it's a little early to look at that. I think we'll give it another quarter or 2 and figure out how we change that.

Okay. And if I get one follow-up also, separate subject.

Last quarter, you reported a slight improvement in the renewal rates on blades with bundled blades and a la carte blades. Did that improve and hold?

Where is that at this point?

It's pretty much in the same area. It's slightly above 60% for the unbundled and slightly higher -- or around 40% in the bundled, which is a great number.

Gil, I have a bigger-picture question about the future of network security. With an increasingly mobile and virtual workforce and the proliferation of cloud services, how does network security architecture remain relevant in the future?

Because most of us work in banks where everything flows through the corporate network, but many less regulated industries have employees that spend their entire day accessing salesforce.com, Gmail and Box over public networks and never even touch a corporate network.

First, it's an excellent subject, and I think it's -- there's a combination of different elements that needs to be secured. Most companies I know of, or all companies I know of, still have a corporate network and still have data centers that they need to defend.

On top of that, there are virtualized servers that can be protected, because they want to use public cloud services, but that still can and needs to be secured. And we have several products in the virtualization area and in the private and public clouds.

And you were speaking about Software-as-a-Service kind of services like Gmail and salesforce.com and others. These are more difficult to secure, but there are still some technologies that can be used.

They are more difficult to secure because, by definition, you use a shared infrastructure and use an application that's shared amongst multiple companies. But even in there, there are few ideas about securing that.

And by the way, some of that around mobility and data security, these are definitely areas we're working on and this is an area that will show some nice innovation during the rest of the year. So this is clearly an area that we are working on.

Overall, I haven't seen any company that sort of moved from securing their data centers or their infrastructure, quite the contrary. I mean, the cyber security risks are getting higher than companies -- as much as they leveraged some Software-as-a-Service cloud services, they are still having a pretty -- and in the enterprise space, they still have very serious data centers and corporate offices that they need to defend.

And if I can just ask a quick follow-up of Tal. Tal, the cash flows this quarter benefited from a $65 million sequential change in trade payables and other accrued liabilities.

Can you just walk us through, is that related to the tax -- the cash tax payment that you received?

Yes. So as I said, we had over in net -- net means we received from the tax authorities and we paid for the tax authorities for previous years.

In total, the net amount was above $50 million, around $55 million, and that obviously reduced the AP -- sorry, increased the AP. Yes, increased the AP because the net result is an increase of the AP, or the tax payable, right?

Because it was netted before. So you had a cash benefit of around $55 million in our operating cash flow.

I was wondering if you could talk a little bit about your trends in blade attach rates. And I think there is this expectation of product revenue growth in the second half of the year, but I'm just wondering what you're seeing overall for these blade attach rates, and if that could put pressure on the second half if your attach rates increase?

I don't know why. I mean, more blades should not put too much pressure on the product.

But we are seeing changes in the blades, and we are seeing very positive changes. So some of them are driven by different packages that we provide to customers, but overall, as we see the blade sales, they are going very, very well.

Nice increases on all blades, both in units and in revenues, and nice renewal rates. And that's, I think, over all, a very positive picture when we analyze the data about the blades.

And that's true for all the blades, for the IPS, for the application control, for the antivirus, for the URL filtering, for the Anti-Bot, all these blades are doing quite well, showing high growth rates. And I think we're very pleased with that for both deals, both the blades that are bundled with new products and mainly for the unbundled blades that customers either buy a la carte or renew from previous years.

Tal, is there any kind of quantification you can provide in terms of what your blade attach rate looks like now versus a year ago?

You mean the renewal rates or the percentage of the software blades out of the products? I'm not sure I understand the attach rate in this regard.

Yes, the latter part of that question.

Yes. So actually, it's increased -- it's increasing about 2%, which means it's hurt my products' growth this quarter as well and moved it into the services, but I didn't want to give 3 explanations for the product weakness, so I thought 1 is enough.

But to your question, we see more attached, so it's slightly ahead in that and better in the future hopefully. Bear in mind the fact that the renewal rates are between 40% to 60%, but it's a heavier burden as the number is growing up.

So it balances that. I can say that, when we look at the unbundled, we see a very high growth rate there, obviously higher than the bundled, because the bundled is somewhat related to the growth of the product, while the unbundled is the customers that are choosing freely to renew or to buy a new blade.

In that, the numbers are growing faster than the bundle, which is great news. And we see that growth in application control, in antivirus, in URL filtering, even Anti-Bot, although a small number, very high growth rate.

And I think it presents a high potential, since the addressable market is quite large. Obviously, the numbers are becoming bigger, then the growth rate is slowing down just by the math, right?

Tal, I'm wondering, on the OpEx side, it looks like you did see a faster growth rate here in OpEx on a year-over-year basis versus what you've seen for a while, especially the last 12 months. And I'm wondering if you could maybe give us a headcount number and talk about what drove the OpEx.

Sure. So we talked about already in Q3 and in Q4, when we said we increased our headcount in R&D and in sales, and you see that, obviously, in the numbers fully in Q1.

Another one, remember that the dollar is working against us, because we have about 40% of our expenses are in local currencies that are different from the dollar, and as the dollar got weaker, then our expenses translated into dollars increased. And we see that effect in Q1 and probably for the rest of the year.

So that increases the level of our expenses.

And Tal, how much was the expense impact for currency on a year-over-year basis?

Expenses? I couldn't hear, the expense is what?

I was just asking you to quantify that part on the FX impact on OpEx. How much of that FX...

Actually, majority of the increase actually came from increasing the headcount and the expenses. The dollar, probably around $2 million or so.

Okay. And then just, Tal, on buyback.

It looks like your buyback is up from where it was year-over-year, but if I look at where it was in Q3 and Q4, it was much higher. And I'm wondering if you could talk about why it ticked down.

And then just maybe a bigger picture, the company now has, by my math, about 39% of that market cap in cash. And certainly, highest in the peer group that I cover.

And I'm just wondering what the rationale is for not moving that buyback up substantially versus where it is right now.

Sure. So first, we will talk about the number of the buybacks.

We said about $1 billion in 2 years, so it's about $125 million average a quarter. If I recall, it was around $132 million, so it's still above the average as expected.

The total should be around $1 billion, so you'll see the numbers make sense. Also bear in mind that in most of these periods, we don't control the buyback because it's a blinder [ph] plan that's purchased by a program that we set before we get into the quiet period.

So it's, obviously, going to depend on the execution of the bank that is doing that with the buyback.

I just had a follow-up question on the deferred revenue. Your models typically see the drawdown through the first 3 quarters of the year, and then you sort of refresh that in Q4.

With the building software blade business and that starting to contribute to deferred, would you expect any changing pattern in that going forward?

No, the material change was probably 1.5 years or 2 years ago, when we just started building the software blade into the deferred revenues. Now you see the growth of the software blades is not in 70%, 80%, it's around 25%.

So it's not that of a big effect. And I would expect to see the same phenomena: a reduction in deferred in Q1, Q2, Q3 and then an increase in Q4.

Obviously, we can have some fluctuations, depends on the timing of customers. This quarter, it's reducing about 1%, which is in line with the expected Q1 seasonality.

Keep in mind that many large customers like to have an annual renewal, and we allow them to renew all of their subscriptions and services at once. So it's up to the customer choice, but that's the -- and we allow them to align that anywhere they want.

So that's how it will work. And again, there are still many customers that renew their subscription and services throughout the year.

So on the blades, I know you've got the bundled and unbundled. It seems like the bundled are maybe more part of the renewal portfolio.

Are the unbundled blades just smaller in percent of your total blade mix?

Actually, the opposite. The unbundled already is majority, it's more than 50% of the total software blade, which is why we are excited about the software blade, because the unbundled -- please remember, the definition unbundled means the customers that buys a new blade or that renews from its free will the second year.

So the total is over 50% now. So majority is what we call the unbundled at this point of time.

Okay. But wouldn't the unbundled be less linear than your Q4 renewals?

It can be. But again, it depends on how the customer wants it.

The customer can buy a new blade, let's say now the Threat Emulation, and a few hundred customers buy the new Threat emulation in Q2, that will be in the second quarter. However, in many cases, what the customer will do when the renewal for their entire account will arrive in December or in October, they would just align the whole account and will continue to renew the full account on Q4.

So I mean yes, it can have an effect like that, but not a huge effect.

I hope you can hear me okay. I have a few small questions.

First is what was the unit growth and the ASP? I'm interested to see -- last quarter, I think you said the ASP stabilized, and I just wanted to see if the big deals, the miss or the pushout had any impact on ASPs.

The second question related to that is you said last quarter that 90% of the appliances sold in the quarter were of the new appliances. Can you give us an update of how was it this quarter?

And then I have one follow-up.

I think it's way above 90%. That's why I stopped providing that.

Majority of our appliances that are sold every quarter now is a new product family, started with the 2200 and all the way up to the 61000, so it's ASP above 90%. I actually don't have the exact number in front of me, but it's way above 90%.

And the second question is -- we related to it in the beginning of the call, that actually Q1 last year, we had the growth of over 20% in number of units. This quarter, we saw a reduction in number of new units based on this tough compare but an increasing ASP; that's mostly offsetting with each other.

Got it. So my follow-up question is just to understand -- trying to break down services between the service revenue, the subscription part and everything else.

And you provided a lot of details in the last few quarters on what is the proportion of blades of software as part of services, et cetera, and what I -- when I'm baking out the subscription part, it looks like the growth rate is decelerating in line with what happened to revenues over the last year. So I can only do it on annual basis, but it looks like the growth of subscription is decelerating to mid-single digit.

You don't disclose it, but can you give us some information qualitatively about subscription trends and the correlation between product revenues and subscription revenues?

Sure. We talked about it, we talked about it as well that about 20% of our service revenues are the subscription, and when you calculate the number, then you're right.

The growth of the update and maintenance is in the -- somewhere in the single digits, sometimes lower, sometimes higher, but in -- yes. It's always been in those rates, typically can be in the mid-single digits.

So what else is in services, can you -- if 20% is subscription, what are the other big buckets?

Update and maintenance. That's the main other item.

We also obviously have some small items relating to professional services that can fluctuate between quarters, training and so on.

Okay. I'll take it offline.

I want to understand what happened in update and maintenance as well, but I will take it offline.

Sure. Sure.

So you said a year ago, you had strength in super high-end deals. Did you also have strength in the second quarter of 2012 as well?

Are we going to have a difficult comparison again? And I guess, related to this is it's interesting that your ASP -- well, no.

Let's start there, just start with the second quarter last year. Was the super high-end strong then?

Pretty strong, yes.

Okay. And so I'm just trying to get a handle on when your product revenue growth may start to go positive again.

It looks like you're going to have another difficult comparison again in the second quarter. Your guidance suggests this as well, but you're going to have easier comparisons in the back half.

So I guess, maybe you can talk about when you think part of revenue growth can go positive. And what are the key factors that will get you there?

I think, clearly, in the second half of the year, we're going -- we expect to see more product growth. I think we have many opportunities and lots of upside every quarter, but I think in the -- more expected towards the year end.

I don't know, Tal, if you want to add anything.

Yes, I think you're right in the following sense. If you look at the previous quarters, Q1, Q2, Q3 and Q4 last year, you will see very clearly that in the beginning, in the first half of the year, we had a very, very high unusual growth in number of units, where typically in Q1 and Q2, it grew over 20% in double-digit growth, as we reported.

So that makes it a very tough compare. When we look at it to the second half of the year, it came back to the regular growth rate, and therefore, I think it's more a fair comparative doing the second half of the year.

And that's why I think we expect it in the second half of the year. Having said that, I will take into account general macroeconomic, on the one hand, and on the other hand, the opportunities that we see in front of us.

And that's why we provided a big range, and we said we will look into that, the annual guidance, after we see Q2 results.

Last one for me. Do you think that the ASP change year-to-year, which went positive the last 2 quarters, I guess, will continue to stay positive and increase as the year progresses?

It's actually increased nicely this quarter. The effect is, by the way, not as a result of prices going up or prices going down but the mix shift.

So if we sell more mid-, high-end appliances and the ASP going up, and that's what we've seen in Q1 and also in Q2, which is a good phenomena. What the results should be that the multiple of the number of units with the ASP should increase in dollars.

And that's hopefully, we will start seeing in the second half of the year.

There have been a couple of questions on deferred revenues and the strength around that. Although if you kind of look sort of within the numbers, the short-term deferred revenue did decline sequentially, as we usually see, but long-term deferred revenues actually had a pretty nice increase, and I don't think we've ever seen that before in a Q1.

So just was wondering, why was there a mix shift to long-term deferred revenue in this quarter?

Yes, it is -- I mean, I say it every quarter in the long term. Long term is sometimes the customers just decide to take a service, instead of 1 year, to 2 years.

And then it includes in the long-term contract, and therefore, in the long-term deferred revenue. This can happen in any quarter.

Typically, we see much more in this type of increase in Q4, as you said. Last year, we actually seen a lot of it also in Q3.

And this year, we've seen some of it in Q1. It pretty much can happen in any quarter.

That's why I look -- when I told you the minus 1% in deferred revenues, I looked only in the -- on the short term, because the short term is reflection of the run rate, and it was as expected in the short term as well.

And then, Tal, just a follow-up on the ASP and unit commentary in terms of ASPs being up year-over-year and units down. I was curious if you saw any big differences in either unit or ASP growth if you were looking at Europe as compared with North America.

I don't recall, actually. I think maybe Europe was stronger than the U.S.

in general.

Okay. And then just finally for Gil.

You mentioned, Gil, the 11000 appliance series. It is targeting a bit of a new market for you -- or new market segment for you, I should say.

Is this something which you think over time can be a material contributor for Check Point? How are you sort of viewing this appliance?

First, I think it is a very exciting market for us. We had products in that marketplace, the UTM-1 Edge, for a long time, but that's a product line that's probably about 8 or 9 years old.

So I think it's a great time, and it's probably long due to renew that line. I think that can re-energize.

I mean, in the last 2 years, I think we had some lack of focus in the -- on that market branch office. And I think that can completely re-energize that market segment, going into a multi-site installation where customers have hundreds and thousands of different branches where we secure them all.

And I think that's a very exciting market on the enterprise space.

Yes. Just 2 questions.

One, on those high-end deals that pushed, are -- those are obviously install-base deals. But I just wanted to ask if there were any competitive dynamics or any new guys in those bake-offs that you saw.

No, I don't think that there's any new competitors. Our market is competitive and always been competitive.

Specifically on the super high-end deals, I don't think that there were any competitive pressure, because clearly, lump -- I should not say, a lumpy business with small number of large deals.

Okay. And when you talk about sales pipeline being obviously strong, I mean, just compare that anecdotally to what we've seen over the last 3, 4 quarters, right.

I mean, it's been kind of a transitional period for you guys. I mean, is this -- is it the best you felt that you've seen from the channel?

Or maybe you just talk about that relative to what we've seen on the last 3, 4 quarters.

I think it's we have a healthy pipeline right now. But again, I mean, I would warrant that a healthy pipeline, combined with all the numbers that are not in the general economy and what we've seen in other sectors of the technology, warrant that we have a wide range.

If all the pipeline matures, then I think we have a excellent outlook, but again, not always what's happening.

So first, Gil, I wonder if you could provide some more color just what you did see geographically and how you're kind of thinking about what you're going to see there for Q2 in terms of the pipeline. And then also, just wanted to make sure.

So you guys are just maintaining, simply, the full year guidance, and then expect an update at some point in the future?

From a geographical standpoint, we have, as I said, very good forecast for the Americas. And I think in Europe, we also expect to see a healthy second quarter.

And these are the main 2 ones. And for the rest of the year, I think we'll see after Q2 if it needs to be revised or not, if it's -- I think we'll wait and see.

Gil, on Threat Emulation, that seems to be a popular area right now. I'm wondering if you could just give us a little more color on the interest levels you're seeing in that and then maybe competitively, what kind of win rate you're experiencing versus maybe Fireeye in that market.

So first, we're just starting, so I can't speak about win rates and demand yet. We just announced it a few weeks ago, and very, very new.

In terms of how our solution is different. First, I think our immediate competitors don't have something comparable to that, and I think the unique value that we provide in the Threat Emulation space is the fact that it's all integrated into one system and the fact that we actually have prevention.

If you look at many other emulation kind of solutions, they analyze the files pretty much offline, and if there is a threat found, then manually, someone had to go and look for the file. What we have is a real-time in-line system.

You get an e-mail. If the e-mail is unknown, if the e-mail is not recognized -- and by the way, if the threats that we are focusing on is the threats that, I don't know how well we are aware of it, but these threats that arrive in Word documents, in PDF files, in presentation, in Excel files, in all types of documents we receive, we open a document.

It can look completely innocent, and while the document is opening, it also installs the malware inside our computer, sometimes a bot, it can communicate with the operator and so on. So these threats are really serious threats and really ones that can come by to everyone.

And what we will do is we'll take that e-mail, send it to the Threat Emulation engine. The Threat Emulation engine, by the way, can be a cloud service that we provide or it can be an appliance that a large enterprise would like to install locally.

It runs the document in the sandbox, looks for the different behaviors, and then it either tells the main system, pass the e-mail, nothing was found, or it tells the e-mail something was found, stop the e-mail, don't transfer that. And that's a very, very powerful thing.

Again, none of the other competitors has a real-time system like that. And I think it's -- at least from people I've spoke to, it receives a high level of interest.

Great. And Tal, the software updates, maintenance and subscription declined sequentially.

It's unusual that we would see annuity revenues declining sequentially. Is there some other portion, professional services or something, that might account for that?

Yes, there might have been. So for services, typically -- in talking sequentially, between Q4 and Q1, that can -- that actually happened, I think, 2 or 3 years ago as well.

It relates to what you said. Many times, professional services and training coming in Q4 and then reducing in Q1.

So we had that also 2 or 3 years ago, and we had it as well this quarter.

And just any macro perspective -- you've talked about the security market in Europe particular, but have you sensed anything from a macroeconomic perspective that's changing in terms of budgets or the effects of world events as having an effect on IT spending in general?

I think we see it constantly for a long time, there's great pressure on customers' budgets. On the other hand, I would -- I think that when customers understand the importance of cyber security, it also receives a good priority.

And then let's remember, it's also a small portion of the IT budgets in most companies, a tiny portion. So I think overall, yes, we see a pressure from the different economies.

And on the same time, I think the opportunity is there, and there's still a lot left to our execution and our general marketplace, so we -- so there's definitely an opportunity for us to do better.

And I would just add that, in general, I do think that any new market is immune to macroeconomic, including the security. So it's not immune.

I mean, we know that Europe was slow for a few quarters last year and the year before, and Q4 and also this quarter, they're getting stronger. And this quarter, it was quite a good quarter for Europe.

It was positive both in products and in services. So maybe it's an indication that the environment there is improving, or maybe it's just some quarters are better than the others.

So I don't know how much to read into it. All I know is that we should be cautious.

Just, Tal, as you think about your hiring plans for the rest of the year, how do you think, from a capital expense perspective, we should think about hiring? And how do you plan to go into this next year just from a sales force hiring perspective?

So we expect to continue and hire. I think there are some places that I think that we should hire more aggressively and invest more in sales.

I think in some areas, I clearly see that if we invest more in people on the street, in approaching new opportunities and new accounts, we'll get new wins. And I think within these areas, we plan to accelerate hiring.

Overall, I think we are planning for modest growth in headcount, and we'll continue to execute on that.

Maybe as a follow-up, Gil, do you think we should start to see year-on-year product growth here in Q3 or Q4? How do we think about the year-on-year product license growth, or is the subscription growth in blades more important to be focused on?

I think Q3 or Q4, yes, that's what we're shooting for. And I think we've already spoken about that in answer to previous questions.

There's a lot of different opportunity. Right now, realistically, I think it's Q3, Q4, and also some upside in Q2.

And I'll repeat what I said last quarter and the quarter before. I mean, just mathematically, because we can't predict the future, but mathematically, we knew that as we go into Q1 and Q2, this is tough compares, and Q3 and Q4 is more fair compares in terms of the number of the units and -- which enable us to hopefully see the increase in the product.

Can you just give us a quick update on the trade-down effect? I think you guys said in prior quarters that you're seeing that now swing back in your favor.

And perhaps, with an increasing number of software blades that people are uptaking, are they seeing that need to, then, swing back up into the prior, I guess, before the update or refresh that you guys went through?

So I think in the last quarter, we've seen an uptick in the ASP, and that's also in the mix of products. So I mean last quarter, customers bought more higher-end and enterprise product and less midsized product, the opposite of what we had a year ago, which I think it can be starting to stabilize and people start to see the value and the power they need to run all the software blades and the additional security that they want.

And are you guys seeing anything in terms of specific market verticals and any weakness in any of those, or any particular strength?

We didn't see any material change in any of the verticals.

Tal, just a follow-up in the ASP. Can you quantify the improvement year-over-year or sequentially?

In the ESP?

The ASP.

I didn't provide it. I didn't quantify it.

What I said is the number of units went down, but the ASP moved up.

Yes, and that's why I was asking. Is there any color in terms of the year-over-year growth?

I didn't provide it, no, so I wouldn't like to provide more of that because -- and the reason is because I think now we're getting to the point that we should see the total quarter booking increasing towards the end of the year, and it's not about how many units increased and how much the ASP increased. But I can tell you it wasn't 1%, 2%, 3%.

It was more. We've seen a nice growth in the ASP.

Okay. So it really just comes down to units, in your perspective, that ASPs would stay stable from what you see going forward?

No, it's actually -- and that's the reason why I would not provide you more information, exactly because of that. Because in reality what happened -- and we have that before as well.

Many times, number of units change and ASP change. It's very natural, because every quarter you can see some different mix.

The only thing that last year, it was unique, and that's why last year, I provided it every quarter, is that because we launched this new product line, we've seen a huge shift in number of units and a huge reduction in the average ASP as a result of this mix shift. Going into this year, we should go back into a normal universe soon where we should look at the total quarter growth, and that's about number of units and the ASP per quarter.

And Gil, real quick, anything unusual you're seeing in channel discounting or incentives that are being put forth by your competitors?

No, nothing special. Again, we have a competitive market.

I think our competitors are working very, very hard, and I think we're also working hard and trying to grow and consolidate the marketplace and provide more solution to the customer and focus on the customer. That's influencing some positive changes in many channels, and I hope that, that will be reflected in the future.

Thank you very much for everybody joining us. I apologize for the little issue we had with connectivity today, but technology, sometimes it just doesn't work.

So with that, I'd like to say thank you, and we look forward to speaking with you guys in the coming quarter. Take care.

Goodbye.