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Check Point Software Technologies (NASDAQ:CHKP)

UBS Global Technology Conference

November 15, 2012 12:00 PM ET

Executives

Kip Meintzer - Head, IR

Tal Payne - CFO

Analysts

Brent Thill - UBS

Brent Thill - UBS

Thank you. And welcome everyone to launch. So Check Point is here for launch, we’re going to keep this interactive again for you, feel free to jump in with question. I have a handful of questions. But Check Point as many of you know has really been the de facto in the standalone security market, if you add all the players behind them up they don’t even get close to the revenue figure. I think it gives you a sense of their scale of standalone vendor, their cash flow has been a standout and we’re really happy to have Tal Payne with us CFO; Kip Meintzer, Head of Investor Relations, many of you know him for quiet sometime, Kip needs to read the Safe Harbor statement.

Kip Meintzer

So we’ll just start off with the Safe Harbor, obviously during the course of the presentation, and subsequent Q&A, there could be some forward-looking statements. They are covered under the Securities and Exchange Act of 1934. As far as the statements are concerned, you can find all the risk factors associated with them in our latest press release or our 20-F file for the year-ending December 31, 2011. And also we make no duty to update any of the forward looking statements that are made. With that, I'll throw it back to Brent and we’ll go from there.

Brent Thill - UBS

Great. May be at a little high level if you could just help level that, we’ve had a handful of security coming here this week and I think it’s been pretty interesting to hear about how defensive these businesses are. May be if you can just talk through why, your particular industry has been so defensive and why you continue to effectively, all our network spaces continue to outgrow some of the other categories of security.

Tal Payne

Sure. So first if you look through historical data you will see that in recession period, your tougher macroeconomic environment, security is usually more, it’s not protective completely but the effect is slightly muted because it’s a critical infrastructure, it’s critical for the organization to protect their environment and it’s less of a discount environment and price competitive environment, although there is competition. Its more about the quality of your technology and the value they provide to your customers. So we’ve been seeing it for quite a few recessions and hopefully we’ll go through that one that we might be going through right now.

Brent Thill - UBS

Just on the network side that has been a particular (inaudible) what’s going on there versus what’s you’re seeing just as it relates to some of the end point categories. What’s drawing customers into this?

Tal Payne

So I think endpoint specifically is more a commoditized environment, network is special since it require very high level of security skill. On the other hand, network going through consolidating in the different adjacent markets of the network.

So if we look historically network security started with a firewall and then there were many different security solutions that appears, there were antivirus, anti-spam, then URL filtering, IPS and so on. And each one was almost like a separate universe that had different competitors that played separately.

Since probably 2005-2006 we see more and more companies requesting to simply this complicated universe and consolidate this functionalities for them. Obviously the higher you go the less you need it, because you have the budget, you have the manpower to maintain all these different security solution, and the lower you go, the more consolidation you need.

Now the consolidation that is required is not only on the purpose to reduce the total cost of ownership that you don’t have to have a separate gateway per security solution, but also because it became unmanageable. When you think of a regular IT department, if you have to manage more than 10 different security solutions, it’s quite complicated. Not only that you have to have a separate book for each one, you have to put the rules and the policies in each one of these solutions. You need to learn how each product is working. You need to have to update the software every six months.

So it’s quite complicated universe and more and more customers came to us as market leader. We are today number one security player in the network, standalone player in the network, also not standalone. And they expect us to do that work for them. So in mid-2009 we came with a soft tool blade architecture which goes to your question of why this network security is doing so well because as we consolidate this market, it allows our main market to grow faster than those adjacent markets as a result of the consolidation. So that’s how it works.

Brent Thill - UBS

Over the last three years, you know prior to this year, you had taken market share every single year. So have some of the other players and what’s interesting is, if you look at Cisco and Juniper, they have a combined pool of over $2 billion of security, spent in fields like many benefited because of Cisco and Juniper’s lack of on this space.

This year the dynamic shifted a little bit, I think there is questions around, what’s happened to the first nine months of the year, in terms of what’s happened with the market shares. You’ve seen some your growth slow, other growth rates have been good, so there is the question is there a make shift in terms of share going on and clearly there’s a lot of different dynamics at work. Can you maybe just bring us up to speed in terms of what you’re seeing this year versus what you saw the last three years?

Tal Payne

Actually the market dynamics didn’t change in the sense that we still take market share, it’s just that it’s very hard for you to see then I'll walk you through it. so first let’s take about market data, not my data, IDC issued a report about Q2 and for the first time in IDC report, Check Point moved from number two to number one and that’s based on the numbers of at the end of June. So this is updated and the UTM in the firewall market which is the main market. and Cisco moved down to number two and we moved to number one although I have to say that we believe we’ll be number one for the quite a long time, it’s just that it took some time to show that. But we’re number one officially according to IDC report in the end of the Q2.

So why this is hard for you to see specially this year. At the end of last year, we launched a whole new product line and the new product line basically from end-to-end from the lowest to the highest product is allowing customers for the same price level to be able to get three times throughput. the idea behind this is to allow customers to have as much performance as they need in order to be able to adopt all this additional security solutions that we provided which we called the annuity softer blades, be it IPS, application control, on the box and many more examples. In order to do that, we want them to have the performance, so they won’t be degradation in the performance of the box.

So in order to do that, we allow to have much more throughput on the box. Now as we are going through a mix shift, first a reception in the market for the new product was amazing. It really was, you can just see by percentage of the transition. We launched it at the end of last year, already in Q1 more than 60% of the appliances that we sold were the new appliances and in Q3 more than 80% of the appliances that we sell is the new appliances, the new product line which means market accepted it very quickly.

Now, we see a mix shift, mix shift meaning that customers can choose out of this product line since we allow them much more throughput, some of them choose to go one level down which creates a mix shift from the high to the mid and from the mid to low which resulted and reduced average ASP. So our ASP reduced significantly but number of units increased in more than double like in a significant double digits, like probably between 15% to 25% depends on which quarter, which is completely not normal for our industry which is quite an existing industry for quite a long time, it's like a start of industry.

So, significant double digit is a new phenomenon, which shows that in the competitive environment, we're doing great. Customers are buying more products, be it for refreshing or refresh of all the units, it can be for new projects and it can be new customers. So we believe we actually continue to be very strong in the marketplace. It's just that this year we suffer in the numbers that you'll see in the products revenues, it affected the fact that the mix shift reduced the average ASP.

Going into next year by the way, since we had such a quick transition, next year, we anniversary this transition. So next year the ASP should stay in the same level like this year. Therefore, it will continue to increase the unit, we should see growth and acceleration in the product revenues which unfortunately, we didn’t get to see this year.

Brent Thill - UBS

That was helpful, thanks for setting that foundation, I guess as you look at the unit growth has really ticked back up, is there now an opportunity to go back to this install base and sell them the blades, they didn’t really I would assume given the lower ASP they attached a lot of blades to what they bought, is that a fair assessment or?

Tal Payne

Not really. Just because when we sell an appliance, we typically embed in it many of the unused blades, think of it as a marketing tool, we give them a spot of the appliance not only firewall VPN, but many times, we also provide them IPS and application control. By the way, let`s also put a birding on the product growth because we have to split. The portion of the ASP that is allocated to the subscriptions and put it in the deferred revenues and recognizes it in the service line. So, that’s another weight on the product growth but it’s a transition period so it's okay. So, they got some of these blades, as part of their appliance. so once they next year all this blades that included in all these units that we saw was increasing double digits, is an opportunity for next year in yield. Because when next year comes, we have to pay for it, so if they choose to renew those blades, then it’s an opportunity for the growth in the subscription line.

Brent Thill - UBS

Okay I think the hard thing we've all had a hard time reconciling is just the product revenues slowed dramatically, you're getting good unit sell through but we go to the deferred revenue (inaudible) as well, it should start to show up there but as I understand, you have a lower maintenance rate for appliances versus software, so is that having some impact on your…

Tal Payne

Not really. You're right but it its two different phenomenon, because the product booking is not part of the deferred anyway. Majority of the deferred revenues is update maintenance subscription so when you sell a product, if the ASP moved down and the units went up and the multiple is low single-digit, it affects your product revenues, it doesn’t really affect you differed.

Differed is a different phenomenon. differed is effected by mainly update maintenance in subscription and there you can have different quarters, different, typically Q1 the differed go down, Q2 differed goes down, Q3 differs go down, Q4 differs build for the rest of the year. So Q4 is the quarter where more of the updates and maintenance are coming, they can be shift between the quarters when it comes to show up.

For example, many customers if they refresh their install base, they will realign their service contract as well. So the service contract doesn’t appear every year in the same contract, it depends what that customer did that year. So there can be some mix between quarters. Also long term contract you need to pay attention to that, because if you look, Q3 last year we had a substantial increase in the long-term contract. And if you notice our sales people, look at the short term growth at the deferred revenues, not at the long term, because long term can shift. So last year we had a lot of long term contract which obviously do not appear this year again, because we took already two, three years. So it affects the booking in Q3 this year.

Brent Thill - UBS

Is it fair to say kind of bottom line, there’s a bunch optical things going on this year? it may be hard for us all the team when we’re looking at financials, but from what you see as being the CSO, that this is a one-time event, I know you’re not guiding next year, but we should start to see some relative improvement in terms of the product side assuming this environment stays where we’re at in terms of the stable environment?

Tal Payne

Yes. So I think you’re right. This is like a big transition year, I mean the expectation that in two quarters, more than 80% of our new product will be 80% of the appliances is quite big, so it was a very quick transition, which was very successful, which affected the numbers in a much bigger way. Also note that for us 40% is zero and if you Europe currency is being affected then it reduces the buying power of the customers. I won’t price it in dollars so they can buy less in the same budget, because they have less in dollars. And therefore it can push it even further into their mix shift flow. So as economy improves there as well, we should pick up there as well, having said that also in Europe we experienced double-digit growth in the number of units, which means, again competitively we are doing great. It’s just the customers choose to go one level down, which means for one year, we are experiencing the reduction in the ASP.

Brent Thill - UBS

Okay. I guess some of these optics have also introduce the question of competition and how auto is obviously up there, they are marketing, is going public and certainly being more visible to all of us. We were part of that, the processes of being with them when they went public and doing the due diligence, there were very few customers that said they were if any, were fully replacing you guys for to put (inaudible) I guess from your perspective it seems like, market’s big enough to support a couple of vendors that everyone thinks they’re just getting one winner and one loser and the market is over. What's your perspective on what's going on and how often?

Tal Payne

So majority of the time, first remember most of the time we see no one, because it is just a refresh. So while there seems to be a lot of competition and in many of the transaction, we really don’t see them because customers are loyal. They like our product. We have given them the best brief security solutions and every year we give them more and more value for the same dollars. So majority of the time it’s not the case.

In the cases that you do see competition, in majority of those cases it’s a competition on the edges software blade. So it’s not on the main gateway. It’s not on the UTM or the Firewall or whatever you want to call it, each competitor calls it differently.

There is a main gateway that has the firewall VPN and a few more functionality. Competition is not really there. They compete with us and it’s not only Palo Alto, its Palo Alto, its Sourcefire, its (inaudible) whoever those players are in this point solution, competing with us when we try to sell the edges of software blade. So when we try to sell only for the customer one, the edge software; so if for example a customer says, I would like to have application control, then you have Palo Alto, you will have Cisco, you will have Check Point.

Today by the way everyone have the solution, like two years ago, I think there were only one or two players that had it. Typically that’s how we started. We have a startup that has a new idea. Most of them don’t work. Some of them work nicely. That was an example of when it did worked nicely. Customers liked it.

So big players going into the game and Check Point came with application control that as of today is the best application control out there. It covers the most application and sub applications and then you see those competition and that software blade solution, now you see the competition. And sometimes you win and sometimes they win.

Typically if it is your customers, you will win because you offer the best deal in terms of the total cost of ownership, because they don’t need to buy a new gateway. Now the rich customers like a high-end customers, you know some of them, their budget is less of an issue and they keep usually the products of any security company. And if you go to this type of enterprises, they have all of the solution.

Question is when it will get to the point of that part of the market is a field and now you need to go to the real market. And the real market does care about cost. And the real market does care about the consolidation and the quality, so there your value becomes bigger and bigger. When it comes to differentiate in the general, it’s like a vast difference like management capabilities, mobility, DLP, consolidation, total cost of ownership, how many applications, sub application we cover, which is the highest and so on. So I can give you many differentiators.

Brent Thill - UBS

Okay. You had pretty amazing result, it’s a light work free drop margin, I mean it’s among the elite. The six years that you have taken the margins out a 58% and that you’re going effectively have to re-architect and there is got to have to be something new that comes to help fight these competitive issues.

Tal Payne

It’s almost like a curse, right.

Brent Thill - UBS

This is a question we get. so I know everyone want to hear your view that from your perspective I mean what gives you confidence that you continue to hold this, based on what's going on in the environment and there is literally dozens of these security startups that are coming out of the woodwork and with big revenues run rates.

Tal Payne

And no margins.

Brent Thill - UBS

That’s right.

Tal Payne

Okay, so for us the focus is perfect. Right so, we’re here to bring our investors real profits and real value and not just inflated revenues, right. This is not our goal. So the reason we do it and you can see we’re here for 20 years, it’s always been that way. So for the people who question is, you have 20 years of history to look at. I can say almost honestly that is almost against my will that the margin is expended, it’s not like we were looking for it. Anybody that know I say whenever they ask me about margin I say, we don’t manage the margin that way.

We are focused in growing our revenues because when we grow it, a lot of it flows to the bottle line. So what did expend it against my will is the fact that we saw a lot of software blades and software blade carries very high margins. So when you have such a high margin in the software blade and software blades is our biggest growth engine. it’s a great opportunity, it’s maybe like a slogan software blade but when you think about it, it’s an architecture that allows us to introduce over time new security solution which are software which built on the same appliance for the customer assuming he hasn’t robust enough appliance to being with and it allows them to become more efficient in the total cost and in the management and for us to take more share in the budgets of the customer. That’s what allows us to grow and majority of this blades are in-house developed so the cost you see in R&D and not in the hardware cost and therefore it allows us to carry significant margins there.

We never said, we're not like trying to protect these margins, it happens when you succeed to continue bringing value to the customer. Our focus always been, always in our DNA, is to bring the value and not to compete on the price and if your focus is that, well you'll allow to do it. Many other competitors should rightfully or not is up to them, they are out of pricing. So it depends where you are in the food chain, right? If you bring the most value, then you can charge more because value carries a price tag, right? So I think that's why we allow it that way and our sales can go up 2% or down 2% because it’s really not the focus. The focus is to bring the value and to continue grow our revenues and our profits and EPS. So, that’s the focus and I don’t see that changing materially unless something out of my consent will happen which right I can’t say.

Brent Thill - UBS

Another luxury of business that you’ve dealt has been the cash which recovered thirty plus software (inaudible) if you rank your market capital as your cash division, you'll be the highest percent of any of these guys by a wide-wide margin, I mean we’re talking football field. So, how are you thinking through this in terms of, you obviously tripled the buyback from, how do you think about this going forward. I know everyone out here is, a lot of these clients are investors, they want to hear your view in terms of how you came up with this?

Tal Payne

Sure, so our view has stayed the same, it’s just that we are now more lenient to more-more buy back but we always believed in the buyback as a tool to return to the shareholders. We have two main goals in our cash, one is M&A, working capital is always to be fair, we don’t need a lot of working capital in our type of business, but working capital obviously. M&A, we would like to have M&A as we said for many-many years, sometimes they're more opportunities than others. So if you look at some years, we had bigger opportunities, in the last two years, we had smaller opportunities. It’s really the opportunities are relating to availability of great technologies on the one hand or customer embrace or geographical penetrations. And on the other hand, you need to look at the valuation and it needs to make sense right? They can be very nice technologies but the valuation doesn’t make sense, so we don’t want to buy that type of companies unless for us, we can move supply to it and make it much bigger. So, as you can see in the last years, we didn’t find such an opportunity but the idea is that we would like to have, cash to enable us when the window of opportunity will open to have M&A, so that's one.

Brent Thill - UBS

Can I ask you a question on this before you jump? There are so many interesting startups that have happened, what has not been appealing to you, to not use the cash, you just feel like you can build it or you feel like that maybe they're marketing is not, that really isn’t a viable end market?

Tal Payne

So first, we had like three small technology acquisitions in the last two years, so we do have that, but when you look at this type of companies, you need to see what it makes for you, so sometimes there is a startup, there is a separate initiative, it’s great, but it would not necessarily appeal to the mass market, it can be for very high specific end of the market which requires a lot of customizations in the customer site, a lot of a headcount in order to do this customization.

I'll give you an example, when we started with the DLP, we were very interested in the DLP market and we looked at many of the DLP companies and they had very interesting technologies but technology was not built in a way that you can you give it to the mass. It was built in a way that it requires a lot of customizations. As a result, it’s currently the Check Point wonder which we need to support hundreds of thousands of sites and you sell through distributors and partners and it needed to be almost off the shelf in a very easy way to install, so many tens of thousands of customers would be able to buy.

So sometimes there is a limit to the product. It can be as a standalone very nice but only a part of a consolidated large size like us. So you need to choose the right technologies that fits the mass of the market. And that’s why by the way we see many of these start-up companies start very strongly and they hit the ceiling but at that point of time, they don’t see too capacitive. Some of them is 50 million, some of them is 200 million but many of them hit that ceiling exactly for that reason. So maybe that’s why.

And when we see something that we can take and leverage and put sometimes as software blade then it makes sense and then we buy these acquisition. I can give you an example the application control was brought that way, the application control was a technology that we acquired the engine, we edited a lot of application and introduced it as a software blade and that worked wonderfully for us. Because it’s now it’s part of any appliance that we sell, we already have more than 40,000 software blades out there and it’s a tool to introduce it to many, many customers in a shorter period of time. So it needs to fix.

Brent Thill - UBS

All right. And just, on there’s a really catalog, can you just give us, do you hear lot of different moving pieces, what’s going on in terms of?

Tal Payne

They keep moving that’s why. So I give you like the update for the beginning of the year, the update from the last two weeks, okay, there’s a few thing. So just to put it in context for all of you when our cash is, most of our income is in under the tax jurisdictions of Israel and some of the income historically pre-2012 or some of it was free of tax and some of it we had to pay for taxes for and I won’t complicated it for you. You just stop at that point.

And if you want to distribute buy-back or dividend from tax perspective dividends and buyback is the same, then from the income that we pay tax for, we can distribute it with no tax implication. But if you would like to go to the income that was subject to tax, it was free of taxes then we can distribute it, but we’ll have to pay taxes on it. The taxes for each company is different. For us it’s probably around 20%.

So most of the companies chose not to go into that bucket and not distribute that as buyback or as dividend. And that’s majority of the cash that you saw left on our balance sheet that before that is relating to those. And the rest we distribute it as a buyback.

Since the beginning of 2012, a new tax rules came in which basically solved that problem for the future. So we said any new income that you make from the beginning of 2012, you pay taxes for, it’s a reduced tax, it’s not the full tax. So for us the PML tax rate remains the same. The cash tax rate moved slightly up. But now we are free to take this cash and distribute it as buyback or as dividend. And that’s what by the way; you saw that we announced a quarter ago that we increased our buyback up to 1 billion, up to two years, which means average 0.5 billion a year. So if we’re linked to the net income that we produced we can basically distribute all of it or use it for buyback. So that’s the tax reform from the beginning of the year.

Since then a few weeks ago; I think it was like two weeks ago, a new tax rule passed, which is more like a pardon of a prison, right. It’s like a free ticket, it basically says, your jailed money that you will have to pay 20% if you want to distribute it, now you can pay less. The less is depends on which company and how much out of that they are going to utilize. So let’s say for us, it can be between 10% to 15%. So it’s like a significant reduction, maybe 40%-50% reduction in the tax. But in order to enjoy it you need to decide in 12 months. So it’s a onetime opportunity. But you don’t have to distribute it. You can then use it for anything you want; M&A, buyback, dividend anytime in the future.

So they don’t force you to make the move quickly, but they want you to pay the money quickly, right. So it’s a good deal for many companies. It’s not a bad news, it’s only good news. But many companies probably will not use it just because there’s many conditions. Some of them relating to how much money you have to invest back in the industry. And if it works with your plan, then it’s worth it. And if it doesn’t work with your plan then it’s not worth it. So there is no decision. There is also some clarifications that needed to be done but to some (inaudible) I will say, it’s good news and by the end of the next year, you will know what we decided

Brent Thill - UBS

Okay just unclear, the jail money was at 20%, now it’s down to 10%or 15%.

Tal Payne

Yes.

Brent Thill - UBS

Got it okay.

Tal Payne

For one year opportunity.

Brent Thill - UBS

You’re still cash, significant, okay that make sense thank you, I know it’s been moving around, Kip has done a great job of helping us understand this.

Question-and-Answer Session

Brent Thill - UBS

You introduced a high end appliance to go after the service provider market 61,000, what’s the update on how that’s doing?

Tal Payne

Actually we see a very nice final coming from that area. Majority of the customers actually not the service providers but all the other industries that we see it in financial, we see it in telecommunication but not for the service providing portion, we see it in almost I think retail, so we see it almost in any vertical and the service provider is a process right of certification, a process which takes longer but we have a great products for them as well, so if you get exciting product for us because its opened a new area that we didn’t sell to before and it’s increasing very nicely.

Unidentified Analyst

Hi, thank you, can you compare a competitor like an F5 who would be someone who came into the market from a different direction to sort of purpose built security companies? How are they different? How are the same, how you continue with them and how investors should think about companies like that specifically F5, because they are talking a lot about their security opportunity, thank you?

Kip Meintzer

So for starters I think they are addressing a different part of the market than say a Check Point would, I also think they’re delivering a much different solution, mainly they’re ending up packaging it all into their load balancer with ADC, that’s going to be probably better served around the data centers, something along that lines. My understanding is their application level capabilities is one directional. When you look at the market that a Check Point serves, it’s more along the lines of the enterprise where application control and things along those layers that the network, it’s getting down to a granular level, I am looking at the individual within the corporation and be able to delineate where they can go, what they can do at that level and that's not something that its being served by them.

It doesn’t mean that it can't change something in the future; it’s just that at this time that’s really the differentiation. I think it also comes from the fact that we come purely from the security side of the business and so folks that generally buy security from Check Point are truly interested in security. When you're buying it in a thrown in type of way like it might be in that case, I'm not sure it’s a differentiated type of product. I think it’s more to compete with other folks, that might be (inaudible) for them, similar to the way Cisco and Juniper compete in that market of security than if compete against peer security vendors.

Tal Payne

I will just say that, in reality, we don’t really see them so; I don’t think they even try to see us as well. I think it’s more in the application there so maybe Palo Alto maybe seem them more and not in our market at this point in time.

Unidentified Analyst

Palo Alto is interesting, I am just curious that, they are made in California, manufactured in California, most of the customer services, there I mean they have this US centric draw in a lot of the high tech comings that have drawn them in, US federal government drawn them in too and obviously that’s been an area that you don’t really spent I think a lot of your time. But when you go outside the US, you going in to Asia, you go in to Europe; I mean you’ve got home court advantage, right. So what are you seeing there?

Tal Payne

Well it’s what, it’s not exactly home court, (inaudible) you're right in the sense that we are a very global company in our DNA and that we are playing very well both in Europe and in Asia and I would say that biggest competition or most competitive environment is the US. You know connected to the beginning, to the first question about the competition that you have, for the most competitive environment the US for us in Q3, was double digit growth both in units throughout that service booking. So all the parameters was actually double digit, in the most competitive environment which should go back to the beginning of the question. So you right. I think like Palo Alto is more US, its working at maybe more Asia and in Europe so different players doing better or worse in different areas and we are in all over there, for us Europe is about 40%, so it’s quite large compared to all of the other competitors. The US is 42%, 43%, and Asia is direct so, you're right. And Government for us is quite small. I mean off the total government is probably around 10%, and US is a small portion out of that.

Brent Thill - UBS

And in Asia, what are you most excited about in terms of your opportunity, is there any particular country or area that you feel, you can do better?

Tal Payne

I think everybody always talks for example about China and the opportunity there, but all the industries that I follow is very hard to succeed in China. but I think if you talk about potential, it’s definitely potential but I don’t expect it to become a real, I mean it’s a slogan China, right, but I don’t think it will become a real significant market just because in many countries in Asia, local players are very strong, so you are familiar with big names like a Check Point, Cisco in the lower Juniper, but in Asia, you’ve actually a lot of lower, sometime tens and hundreds of local players, so it’s slightly different market, when it comes to that, specially China, India as well but its specifically China. So it’s slightly different market, you need to play slightly different there.

Brent Thill - UBS

You’ve done well, where you’ve kind of spread your wings in different areas. I am curious, you have a iPhone there, I am assuming that, you’ve got a Check Point enabled interface on your home.

Tal Payne

You’re right.

Brent Thill - UBS – UBS

When you think about the BYOD trend? Is that something you’re seeing driving higher unit attach for and then drawing back into backbone of your system and is that something that you’re starting to see?

Tal Payne

I think it’s changing slightly the way like historically end point was the end point and network was the End Point both market and they’re like almost been touch each other. And I think it looks like this dynamic is slightly changing, because you think of the mobile devices then you can’t really put an end point security solution if you just to have it.

And you want to have simple way, you don’t want to have different solution for different device like iPhone, iPad, not BlackBerry, BlackBerry is slightly different, but the Galaxy, all these different softwares on them, how do you managed that. And we are actually having a solution that allows you again to just add software blades to your gateway, so it’s just a software blade you add. And you will be able to manage all these different devices through your gateway. You will be able to remotely decide, who is getting emails and who doesn’t. How many days of email will you have it, if you lose the device, you can delete it, you can have a separate container to manage all the corporate assets and put whatever rules you want to put as an organization and a very flexible tool. We already launched the first version last year you’ll see a new version probably this year. And we think it’s a very interesting market, the mobility in general, based on our information mobility, right.

Brent Thill - UBS – UBS

Number of the security companies that have been here, they talk about APTs or advanced persistent threats. As I understand it, it’s a dedicated attack on a specific person or a specific group of people whether they are not going for you, they are for the treasury department, they are trying take a password and use it for whatever. I mean you’re seeing start up coming, just going after this talking this up saying this is a singular market, I mean it seems like and advance of the threats we've seen on the software attacks, we've seen for many-many years. I mean, is this APT thing helping your business or is it just one of many other?

Tal Payne

It is actually, I mean we already have a solution for that. It’s called Anti-Bot. Again everybody have a different name to call different things, but in general its more advanced attacks that is very hard for the typical antivirus, like antivirus with the signatures. So it can't recognize this strange behaviors and the APT’s advanced threat which can change inside the organization, many of their attacks actually that you heard last year were these type of attacks, that you penetrate into an organization and then it basically goes, works around the organization from computer to computer trying to locate any specific information, and once it locates it, it takes the information out, and it can sit there for years, and you wouldn’t even know it. And I could give some examples but I don’t think it’s good here.

But examples that actually, even government’s been attacked that way of taking information and causing damage inside, at that specific facilities, just with APT. So you have examples like this and it’s starting to attack industries and governments and it’s a serious problem. It helps us, but our job is to help the customer. And it helps the customer if we provide them the solution. So we have the Anti-Bot.

We launched it like a quarter and a half year ago and we already have hundreds of customers using it. So it’s quite fast. It’s an interesting market, but I would look at it as more threat prevention. You have many-many different threats and how you prevent it. As you know we launched a threat cloud which allows also customer to collaborate in a way that whenever we find an APT or a virus or an attack in one of our customers and he is willing to share, then we can share it with the whole people that share our cloud services.

And this is starting to grow. It’s still very small but its starting to grow. And we see actually many customers call us to more support in that area to get this type of information because we are very much involved with these type of attacks, to help our customers.

Kip Meintzer

I can add just one thing onto the APT just so people can understand the difference between what you traditionally knew is now where and what people are referring to as the Anti-Bots or APTs. The real difference is the amount of the resources that have been attributed to developing the actual bot or APT. What your finding with APT is sometimes you can have nations or large amounts of resources developing these actual individual pieces of software. so they’re not necessarily just a little nuisance piece of software they comes in and destroys your machine and holds it for ransom, they’re actually very sophisticated and so that’s why you’re seeing a differentiated product entered into the market.

Tal Payne

Maybe they just want to go.

Kip Meintzer

They’re still sitting here.

Brent Thill - UBS

Just in regards to next year, do you talk about growth reaccelerating? Obviously you’ve talked about the dynamic this year is to what went on. I mean what you gives you the comfort with that growth reacceleration next year, as the pipeline, obviously there is new products but what are the factors that sort of give you the comfort behind that?

Tal Payne

Sure, first pipeline on product is very short term, so you can’t see next year’s pipeline. Unfortunately that’s the way it works in our industry. It’s always remember that, think of the mess. And basically the growth in the product booking is your growth in number of units on the one hand and your ASP on the other hand. So most of the years we saw a growth in the number of units which is maybe single digit depends which year and if flat to growing ASP, so ASP moved out because we moved from software to appliance or because as time go by, customers need more throughput, they need more throughput, they have to choose the higher level of appliance, higher level appliance higher ASP, so that's usually the trend.

This year wasn’t our typical year. We saw significantly more increasing number of units than we typically see, like a long double digit and on the other hand we saw a significant reduction on the average ASP because of the new product line.

When I’m going to next year automatically I understand that the mix shift majority of it will be behind us. So the ASP is stabilizing. It even over the next few years should start moving up because if people need more throughput and I’m not re-launching a new product line every year, then we’ll have to stop moving up on the appliance. So there is still over the year should actually start moving up. So that area I feel like the ASP should stabilize and over time start to increase. When it comes to number of units every year we increase the number of units and I expect to continue to increase it.

Unidentified Analyst

What are the plans to go after the data center markets? It sounds like you can't compete with the F5 world and that's are in different markets than you, why not be more aggressive and go after the same opportunities they are going after?

Tal Payne

I'm not sure. I haven't understood the question.

Brent Thill - UBS

I think the question was on F5 why you are not being more aggressive going after their opportunities that are coming towards your opportunity, if I heard it correct.

Tal Payne

Because we believe we have really a huge opportunity in the software blade that we introduced in the last three years. And we need to focus on pursuing those markets. I'll give you a sense of the size of what we think. If you look at the IPS blade, it’s a $1 billion opportunity, if you look at the URL filtering; it's probably $1.3 billion, $1.4 billion opportunity. It’s a market, the standalone market. If you look at the DLP, maybe half 0.5 billion opportunity. If you look at the application control, it’s a few hundred of millions. If you look at the Anti-Bot, which is advanced persistent threat, whatever you want to call it, it’s a small market but a believe that you will be growing significantly. So we have like six new products in the last three years. Still a small number of our revenues and each represent a big opportunity. So I think you need to see where your best value comes, the value of the consolidation is a big value, we need to make sure each of this blades is still best blade because customers don’t compromise. They want consolidation but they won't visibly see, they need to work overtime on keeping it best products out here while giving them the value of consolidation and that’s large enough of opportunity as of now.

Unidentified Analyst

I agree with that approach but why not (inaudible) the data center or cloud or the (inaudible) of the world. I understand that you are executing well in your core market, and I buy into that, but why that you know if they are going after a different market and that really doesn’t interest us, doesn’t that open up the door for them to…

Tal Payne

For data centers? We are going for data centers definitely. We launched actually, at the end of last year; we launched two products that specifically aimed for the data center. One of them is a 21,400 actually a month ago or two weeks ago we launched 21,600 which is much higher capabilities and capacity and we launched a 61,000 at the end of like, I think it was October or September last year as well. The end of last year that dedicated to data center, we see a really nice option. We also introduced an AGP card which is an accelerated card which customers can use indoors product in the 21,000 specifically which allows them to increase their throughputs like (inaudible) for those boxes. So we are definitely thinking it’s a great opportunity and that’s why in the last few quarters we introduced quite a few products for them. So yes, we are definitely interested in this one. Sorry, I misunderstood your question.

Unidentified Analyst

Going back to the previous question about, your confidence and returning to growth next year, the matter is very simple, it’s like you are lapping a stable (inaudible) growing but what gives you confidence that volume is continuing to grow. When you said earlier that you are lapping sort of like the highest volume growth year that is kind of unusual (inaudible). So how do you know that it was that market share that you took in, that you didn’t just go forward units (inaudible)?

Tal Payne

Sure. So first, I cut not for sure, right, just to be fair. When we analyze it, and I want to explain why we don’t know because when you buy and laptop, the seller doesn’t really know if you replace an old one or you’ve expended your network right, so we don’t know. The way for me to know is try to ask the customers, so we typically do a survey to ask the customers why did you buy the unit. and we still like three reasons which are being reported, A, refresh typically a significant portion, new projects that now they can afford, because the product is more affordable, they can have new projects, so that’s not an acceleration and new customers. So if I would see the answer is, all of the customers just did refresh, I would think now I need to check if it makes sense or not, I will mention maybe another factor, I thought recently, it came to my mind and I don’t know if it’s what happening or not, I need a bit more time to say that’s what happening, we actually started to sell appliances only in 2007 or 2008 and cycle is probably five years, may be six years, so this is maybe the first time we’re start to enjoy our own refresh cycle which we never had, so maybe it’s the start and that’s why we see some more increase in the unit. I don’t know so there can be four reasons not three.

Brent Thill - UBS

Okay. Any last questions. Great. Thank you everyone. Tal, we appreciate your time.

Tal Payne

Thank you very much.

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