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Check Point Software Technologies (NASDAQ:CHKP)

Q4 2012 Earnings Call

January 23, 2013 8:30 am ET

Executives

Kip Meintzer

Tal Payne - Chief Financial Officer

Gil Shwed - Co-Founder, Executive Chairman and Chief Executive Officer

Analysts

Shebly Seyrafi - FBN Securities, Inc., Research Division

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Frederick T. Grieb - Nomura Securities Co. Ltd., Research Division

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Daniel T. Cummins - B. Riley & Co., LLC, Research Division

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

Brent Thill - UBS Investment Bank, Research Division

Walter H. Pritchard - Citigroup Inc, Research Division

Keith Weiss - Morgan Stanley, Research Division

Jonathan Ho - William Blair & Company L.L.C., Research Division

Tal Liani - BofA Merrill Lynch, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Operator

Greetings, and welcome to the Check Point Fiscal Year 2012 and Fourth Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kip E. Meintzer, Head of Global Investor Relations for Check Point Software Technologies. Thank you. Mr. Meintzer, you may begin.

Kip Meintzer

Thank you. I'd like to thank all of you for joining us today to discuss Check Point's financial results for the fourth quarter and full year of 2012. 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 January 30. If you'd like to reach us after the call, please contact Investor Relations by emailing Kip@checkpoint.com or by phone at +1 (650) 628-2040.

Before we begin management's presentation, I'd like to highlight the following items. During the course of this 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 the success of those products and programs; and our expectations regarding our business and financial outlook for the first quarter and full year of 2013. Other statements which may be made in response to questions, which refer to our beliefs, plans and expectations or intentions, are also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

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.

Tal Payne

Thank you, Kip, and hello, everyone. I'd like to thank you all for joining us today for the review of the fourth quarter and the full year financial results. Our revenues for the year increased by 8% year-over-year, and non-GAAP EPS was $03.19 -- $3.19, at the top of our guidance and representing an 11% growth. Before I proceed further into the numbers, let me remind you that our fourth quarter and full year 2012 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 those items.

Now let's take a look at the financial highlights for the quarter. In the fourth quarter, our revenues reached $369 million, representing an increase of 3% compared to $357 million in the fourth quarter of 2011. Our software update maintenance and subscription revenues reached $218 million, representing growth of 10% year-over-year. The growth was driven by our update and maintenance revenues, as well as our annuity software blades that are recognized as a subscription. We continue to see great success in our annuity blades, led by IPS, Application Control and antivirus.

Anti-Bot, which was launched earlier this year, is picking up nicely as well with thousands of units sold so far. Software blades revenues increased by over 35% year-over-year and are now over 20% of our service revenues.

Product and license revenues were $151 million, lower than last year's $158 million. These results were affected by weakening economy and by the transition to our new appliance product line. On a positive note, sequentially, both revenues and enterprise gateway units has increased by over 30%.

Revenue distribution by geography for the quarter was as follows: Americas contributed 45% of revenues; Europe with 37%; and Asia-Pacific and Japan, Middle East and Africa region contributed the remaining 18%.

Overall, deferred revenues as of December 31, 2012 were $519 million, an increase of $37.5 million or 7% over December 31, 2011. The growth rate is slower compared to 2011 for the following main 3 reasons. First, last year, the fourth quarter had 52% growth in long-term deferred revenues. This growth was as a result of update maintenance and subscription bookings that are over 12 months and came early. Consequently, 2012 bookings were reduced but not the run rate or the annualized contract value we have seen. Secondly, software blade deferred revenues continue to increase significantly. Naturally, the growth rate is slower than last year, and the total amount is much more significant. And third, as product bookings slowed down this year as we went through transition to the new appliances, the related new services bookings are lower.

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 total order value, similar to last year. We had 62 customers that each had transactions with a value greater than $1 million compared to 49 in the same period last year.

Non-GAAP operating margin for the quarter reached 60%, same as in the quarter -- in the fourth quarter last year. As you know, the fourth quarter margins are typically the highest of the year. GAAP net income for the fourth quarter of 2012 was $174 million or $0.85 per diluted share, up from $160 million or $0.75 per diluted share in the same period a year ago, representing a year-over-year increase of 13%.

Non-GAAP net income for the quarter was $185 million or $0.91 per diluted share, up from $178 million or $0.84 per diluted share in the same period a year ago. Non-GAAP earnings per share reached the high end of our guidance, representing 8% growth year-over-year.

Our cash balances reached $3,295,000,000 at the end of the quarter. Our operating cash flow this quarter was very strong and reached $202 million, representing 17% growth year-over-year. Collection continued to be strong with our DSO at 74 days, similar to the end of the previous quarter.

We hedge our balance sheet against currency fluctuations. During the quarter, the dollar weakened against most currencies in the world, resulting in a hedged contribution of approximately $10 million to our cash flow with no effect on our P&L, as expected.

During the quarter, we purchased approximately 3.6 million shares for a total cost of $160 million.

If we look at 2012 fiscal year highlights, for the year ended December 31, 2012, revenues were $1.34 billion, an increase of 8% compared to $1.25 billion last year. Non-GAAP net income was $668 million, an increase of 9% compared to $614 million in 2011. Non-GAAP EPS for 2012 was $3.19, an increase of 11% compared to $2.87 in 2011.

On the operating side, we achieved non-GAAP operating margin of 59% for the year, up from 58% in 2011. As a reminder, around 40% of our expenses are in local currencies other than the U.S. dollar. In 2012, the dollar strengthened against most of these local currencies and reduced our cost in dollars. As of the end of 2012, the dollar weakened against our main local currencies. Therefore, our expenses for 2013 are expected to increase. For the year, cash flow from operation has reached a record of $816 million, an increase of 14% compared to last year.

And now let's turn the call over to Gil for his thoughts on the fourth quarter and the year.

Gil Shwed

Thank you, Tal. And I also like to thank everyone for joining us on the call today. Tal has already addressed the financial results for the quarter and full year. Now I would like to take this time to share some further information with you regarding the business and our future plans.

2012 marks the year of transition for our customers as they begin adopting our new portfolio of security appliances that deliver approximately 3x the performance. This transition had some good and some challenging effects on our business. On one hand, we saw a healthy increase of 15% in a number of enterprise gateway we shipped in 2012. On the other hand, some customers have chosen less expensive model given the power of our new appliance line, resulting in a decline of the average selling price. We saw a nice improvement in that trend in the third and fourth quarter as customers shifted to a higher-priced and higher-performance model.

From a geographical standpoint, the softness in the economy has impacted our business. In the third quarter, we saw that effect mainly in Europe. In the fourth quarter, Europe started to improve, but North America suffered a weakness compared to an exceptionally strong fourth quarter in 2011.

Last year was a year of healthy innovation and great recognition for Check Point by the industry. ThreatCloud is one of the most significant initiative that we launched last year. The realization that each customer shouldn't fight the world of cyber threat alone and through collaboration, we can get to much better protection is very important. ThreatCloud is translating this idea into reality. Every gateway can contribute attack information to our cloud. Our ThreatCloud service will analyze it and compare it to multiple vectors of attacks, and in real time, we can distribute automatically new defenses to our customers. ThreatCloud was well received by the industry and our customers. To date, we have more than 2,500 gateways that contribute threat information to our cloud, which is a big number to start with, but it is only a tiny fraction of the potential.

Our Anti-Bot Software Blade that uses ThreatCloud infrastructure to detect and defend against bots has also done well. Bots are self [ph] Software agents that hide inside our computers and are ready to perform malicious activities through instructions of the remote operators. Bots have been used in many targeted attacks, as well as some other mass attacks. Our research found active bots in over 60% of networks. This means that almost every company is affected and vulnerable today to bots. Thus, a network-layered defense against bots is crucial.

We intend to continue and raise the bar for security and provide additional layer of security and add in-depth security focus in every element of our product designs. Next year, we intend to further develop and introduce new and innovative threat-prevention solutions. In addition, we will also expand our offerings in the mobility area. I believe that cyber threat and mobility are the 2 most important areas in security these days, and we intend to provide the leading technologies to keep the enterprises worldwide secure.

This brings me to the financial outlook. You know my regular caveat is always hard to predict the future. There are many factors that should weigh in. The increased need for cyber security is an important factor, yet at the same time, the economy can warrant a more conservative approach. As always, we take a realistic approach that has risks in it as well as potential of upside.

For 2013, we expect revenues in the range of $1.4 billion to $1.45 billion and non-GAAP earnings per share in the range of $3.30 to $3.50. GAAP EPS is expected to be approximately $0.26 less than that.

For the first quarter, we expect revenues in the range of $320 million to $332 million and non-GAAP earnings per share in the range of $0.74 to $0.80 per share. GAAP earnings per share is expected to be approximately $0.06 less.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Shebly Seyrafi of FBN.

Shebly Seyrafi - FBN Securities, Inc., Research Division

So you talked about the dollar weakening at the end of the year. That, I would think, help your revenue in the first quarter and the year. Can you talk about what you're seeing? I think your guidance is a little bit lower than it says currently. Maybe you can talk about trends you're seeing in Europe from the fourth quarter as well.

Tal Payne

Well, relating to the dollar, relating to the effect that it has on our expenses, obviously, some of our expenses are in local currencies that are not the dollar. And as a result of the dollar is weakening, then it's an increase of the dollar expenses. When we look at the revenues, obviously, revenues are affected for the booking. This year, you'll see that the bookings [indiscernible] but product booking was pretty much a slow -- very slow growth, affected from the mix shift. Going into next year, hopefully, we'll start to see, as the quarters pass by, more and more increasing the product growth in the revenues.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Can you also talk about the unit growth you had in products in the fourth quarter, appliance unit growth?

Gil Shwed

Appliance unit growth.

Tal Payne

So appliance unit growth versus Q4 did not increase, while ASP did increase. So we start to see customers actually picking up into higher models. Q4 last year was very strong, as Gil mentioned. It was quite a strong quarter both in units and in dollars, so it was quite a tough compare. Again, going into next year, we would like to see a growth in the number of units, which will translate into growth in the dollars, since we did see also in Q3 and in Q4 stabilization and increase in the ASP versus the year before.

Operator

Our next question is from the line of Shaul Eyal of Oppenheimer & Co.

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Tal or Gil, can you talk to us about the high-end appliances, the 61000 then the 21400? How did those perform during the quarter?

Gil Shwed

The 61000 continued to do well. We shipped many units. And again, we have a long pipeline and many, many projects that you work on. It's a relatively long cycle for that kind of an appliance. But last year, which was the first full year that we shipped it to ships [ph] , very nice number of units overall. For the 21400, actually, Q4 was excellent. The number of units went up drastically. I think that was the result both of the fact that we now have the security acceleration unit that we introduced in the middle of the year that can provide very high throughput as well as the industry-best latency numbers, [indiscernible] Microseconds in latency, as well as so many changes that we did in the pricing. We actually introduced a new model, the 21600, using the same architecture but a faster processor. And as a result of that, we slightly reduced the price on the 21400. The overall result was excellent. We sold, I think, almost all the units we could have shipped.

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Got it. And Gil, in your prepared remarks, you spoke about on the transition the company has been going through over 2012. When do you expect this transition phase to be mostly completed?

Gil Shwed

I think by now, we are relatively complete. By the Q4 quarter, and we have over 90% of the units made from the new product line. And I think we're also seeing that the software blades are -- adoption is very, very nice, and there has been over 50% growth in revenues from software blades last year. And the run rate of that is high and is growing in double-digit numbers. So that's a very positive trend, too. And I think if everything goes right and if we see the right adoption, we are ready for a new year of growth. I think not all of that is reflected in the outlook that I gave. I think what I gave is an outlook that is, I would say, realistic to conservative. But I think there's a lot of potential in what we have right now, and I think we will be very aggressive next year in marketing these messages to the marketplace.

Tal Payne

Yes, and I would just add that -- to your question, the anniversary, we start next year. Obviously, 90% in Q4. In Q1, maybe 60% or 70%. So throughout the quarters next year, we should become more and more scale-comparable in a sense.

Operator

Our next question is from the line of Aaron Schwartz with Jefferies & Company.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

I had a question on the comments you made on the bookings growth. You gave a few reasons of the growth there, but one of them was that it slowed down due to the transition to the new appliances. And it was sort of our understanding that this was sort of -- the transition of the new appliances was sort of neutral to bookings growth because you'd make up for the loss in maybe product growth with the upside in deferred revenue growth. So I was just wondering if you could sort of flesh that point out a little more.

Tal Payne

Sure. You're absolutely right. It's just that it's typically, last year, the product growth was 13% and this year was pretty much flat. Then obviously the potential of the growth is lower, right?

Aaron Schwartz - Jefferies & Company, Inc., Research Division

So it was more a comp issue. It wasn't really due specifically to the. . .

Tal Payne

Exactly. Exactly, yes.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Okay. And then the second question I have, if I could, given the new appliances that you shipped over the last 12 months, it seems like there were a lot more pre-bundled software blades pushed out into your customer base. Can you just walk through sort of how you think about or your expectations for renewal rates over the next 12 months and how that factors in your guidance?

Gil Shwed

So with the way we sell the software blades, some software blades are bundled with each appliance. And from an accounting perspective, that means that when somebody buys a product, some revenue is recognized right when we ship the product, and some revenue is deferred for the next year because that goes to the services line, the subscription element of the software blades. Then customers can also buy à la cart blade or -- and in the following year, once the bundled blades are expiring, we can renew them. Right now we've actually seen an increase in the percentage of renewals. So I mean, close to 50% of customers that got bundled blades renew them the following year, which I think is an astonishing number. I think it's very, very high. Usually when you bundle something with a product, you expect 10% or something like that of customers will actually buy the following year, we are seeing almost half the customers doing that, which means the customers definitely recognize the value of the blades and they need that functionality. And we are -- and the biggest growth that we are seeing in terms of blade sales is the unbundled blades. The blades that people choose to buy along with the blades that we bundled with the product. So that's actually quite positive both with -- factors are quite positive in the way we look at blades. Still, if we started with blades 2 years ago, we've -- with I don't know, tens of millions or even less than that in revenue, and it grew very, very fast. Today, we are running at hundreds of millions of dollars of run rate. And that growth rate is not expected to continue in the same percentages moving forward. But I think it will be a nice double-digit growth for some more time.

Operator

Our next question is from the line of Jonathan Ruykhaver with Stephens.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

I'm kind of curious, can you talk about the activity you might be seeing on the IP Series installed base. I think the GAiA operating system has been in the market for about a year. So I'm wondering if you're seeing any kind of conversion at this point or is it still too early in that process?

Gil Shwed

GAiA is in the market for like 8 months now. I mean, and you buy it from the time we introduced it, it takes more time until customers get familiar with it. I get a very positive feedback on that. I mean, people like it, people like the fact that you can use it on the IP Appliances and people are looking forward to upgrade the IP Appliances into the new series. Keep in mind that what GAiA enables people to do is they convert all IP Appliances into new appliances and use the same command line interface, the same features, the same functions that they add on the IP Series and getting that functional parity between the appliance is very important for conversions. So overall, we are getting positive acceptance of that on new and on the older appliances.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Do you have any concerns that within that IP installed base, customers are putting out RFP activity and looking to evaluate other vendors outside of Check Point?

Gil Shwed

Not really. I think the IP Series customers is probably our -- the most loyal customers. That's why we chose dedicated hardware and so on from us and there is competitive activity all the time. And that's happening every day. And I think we win that too. So I mean, it's not competition. It's definitely not something that we're not use to in our marketplace.

Tal Payne

I would just add that if you look at the top line at the end of this year, the number of units increased and the core appliances increased in approximately 15%. And we know that the IP Series is really we sell only low hundreds. So obviously, if we would have lost it, we would see a significant reduction in number of units. So I don't think that's the case.

Jonathan B. Ruykhaver - Stephens Inc., Research Division

Okay. One final quick question, do you see on the new higher performing hardware the opportunity for customers to run more blades than what they had been running on the older hardware?

Gil Shwed

Yes, absolutely. And that's one of the educational aspects that we need to do. Because if the customer has the -- and I think that somewhat explains also what we are seeing in the last 2 quarters. In the beginning, customers have just said, "You know, if we can get for $25,000 -- in the past, we paid $25,000 for performance x, now we can get 50% more performance at $15,000, let's say. So why not buy the lower end model?" I think what part of our education process is to explain to customers that the reason they need the new model is so they can run more security functionality effect, and we are seeing that. I mean, I think that a very high percentage of customers already run IPS, and IPS has a big impact on performance. And we're seeing that more and more customers start deploying more and more blades in that. And I think that's part of the educational process. You got more power, use it to deliver more security.

Operator

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

Michael Turits - Raymond James & Associates, Inc., Research Division

A couple of clarifications and then a question about services. First of all, I just want to make sure I got it on units. You said that units were up 15% for the full year, but you said they were flat year-over-year in the fourth quarter?

Tal Payne

In the fourth quarter, it was pretty flat, yes.

Michael Turits - Raymond James & Associates, Inc., Research Division

Okay. And then that's a nice number, Gil, on the 50% increase in bundled renewals of blades, I think it is up from 40% previously. Where are you on stand-alone renewals? I think the prior metric was about 60% previously.

Tal Payne

It's actually moved up. And the last time we talked about it, it was 60%. And then if you're remember, I think Q2, Q3 I said we see it's picking up, but it's too early. And the last quarter, we had even higher. It's between 65% to 70%. So it's improving and I hope it will continue.

Michael Turits - Raymond James & Associates, Inc., Research Division

So that's picked up as well.

Tal Payne

Yes.

Michael Turits - Raymond James & Associates, Inc., Research Division

And then one question on the fourth quarter, your services only grew 3% sequentially. Typically, they grow a lot higher. I think I was curious as to why they didn't, and especially because the expectation was that in the third quarter there were some renewals that had been pushed off as you were trying to move towards more co-termination.

Tal Payne

Actually, the third quarter we had the same phenomenon. If you look at Q3, long-term contracts also increased significantly. And if you look at Q4, you see also it increased significantly. So it had the same effect both in Q3 and in Q4. Remember, I mentioned 3 reasons, one the long-term contract, which has a big affect, it's probably like explain 6% or 7% of the growth. So it's quite significant effect. You can see it by the numbers, you can calculate it if you look at the long term. Software blade is growing amazingly nice, but obviously as that number is hundreds of millions now like low hundreds of millions, then the growth rate is slowing down. So it's a significant double digit, but it's not the rate that you had last year. So that's obviously reduces the growth rate as well. And as the result of the fact that product booking is not growing, and if it is not growing, you don't get the new attachment of this new services.

Michael Turits - Raymond James & Associates, Inc., Research Division

All right. And just a quick one, any thoughts on the tax rate going forward?

Tal Payne

I would assume the same like last year. I always say it can go up 1%, down 1%, around 20%, 21% just like last year for now.

Operator

Our next question is coming from the line of Gregg Moskowitz of Cowen & Company.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Gil and Tal, just a couple of questions. On the guidance for this year. At the midpoint of the range, your EPS guidance, I believe, assumes a significantly lower operating margin than what you showed in 2012. Just as a back of the envelope, I'm getting somewhere near 56%, again, at the midpoint. And based on current exchange rates, I was wondering, Tal, because you referred to currency, about how much more of an expense will you see this year because of currency? And is there anything else that's being factored into your margin assumptions that we should be aware of?

Tal Payne

Sure. So there are 2 main things. Last year, in 2012, the dollar got stronger. So we actually benefited probably around $15 million or so for the full year. Next year, if I'm taking the year-end rates, then we're probably losing around same number between $10 million to $15 million, assuming the rate of the end of the year. So that obviously affects about 1% in your calculation. Take into account also that the income, on financial income, as the time go by, we have lower and lower interest income that we're getting since now, as you know, it's a very, very low rates that you get on the government bonds and corporate bonds. And we are very conservative in the way we manage our cash and therefore, it's going down. So when you take this to effect, you will get to the number.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Okay, that's helpful. And Tal, was there any variance this quarter between billings and bookings along the lines of what you saw in the third quarter?

Tal Payne

Between billings and bookings, not a significant one, that's why I didn't mention a specific explanation.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Okay. And then just lastly, you did nicely increase your stock buyback in the quarter. Was this more a function of you being opportunistic or should we be thinking about this as a more realistic quarterly buyback level going forward?

Tal Payne

I think, when we approved the program of up to 1 billion up to 2 years, we started with it more. If you calculate it, it's averaged $125 million a quarter. For the last 2 quarters, we did more. And every quarter we look at this and make a decision. We are more opportunistic than before.

Gil Shwed

No. But I mean, I think -- just to be clear, I think that we can expect this kind of levels in many quarters moving forward. It depends on many factors, including the share price. But in terms of we are ready to spend these amounts and we are ready to buy at this rate and sometimes even at higher rates.

Operator

Our next question is from the line of Fred Grieb of Nomura Securities.

Frederick T. Grieb - Nomura Securities Co. Ltd., Research Division

Two questions for me. First, you mentioned the 2012 refresher products were you increased performance about 3x on average. How long until sort of the next comprehensive and significant product refresh? And then second question, just around CapEx, it was a bit higher than we expected, I'm wondering if there were any anomalies in the quarter or if this is sort of the rate we can expect going forward?

Gil Shwed

Regarding the product refresh, I think the kind of refresh that we did now that unified the products line [ph] a year ago. Unified 2 products line and coming up with a complete lineup of products, I don't know when to expect that. I do think that we will keep coming with new models that improve performance or that are important to different segments of the market this year and every year. So I think there are a few, I would say, new self [ph] Product lines and new specific products that are scheduled for 2013, and that will happen all the time.

Operator

Our next question is from Daniel Ives of FBR.

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Yes, guys, just on the trajectory of deferred revenue throughout the year, should there be normal historical patterns or anything unusual?

Tal Payne

Yes. I would say, yes. But then remember that I always said that it can fluctuate easily between quarters depending when the customer is bringing in the contract. Sometimes they're bringing it earlier, sometimes they're bringing long-term contracts that affects the next quarter. So in general, we don't have better assumptions than that, so I would assume the regular rates.

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Okay. And then just -- implied in your year-end guidance, what type of reversal in ASPs relative 2012, I mean, just anecdotally, are you factoring in?

Tal Payne

We assume steady ASP.

Operator

Our next question is from Dan Cummins with B. Riley.

Daniel T. Cummins - B. Riley & Co., LLC, Research Division

First question for Tal. The sales and marketing line was down year-over-year, full year basis 2012 versus 2011. Do you expect that line to be up this year? Can you give us some sense of -- are you making permanent changes to cost structure right now to be able to show that kind of performance, particularly with some really aggressive competitors in the market? And I have a question about the data center business.

Gil Shwed

I'll try to answer about the future. We mostly [ph] Invested a lot this year in sales specifically and also in marketing. And I think we've -- in the last quarter, the last 4 months we've added many, many people to the sales force. And I think next year, we hope to see results of that because we're starting 2013 with a sales force that's much, much bigger than what we had last year. So in terms of future investment, we are making future investment. And I think we do believe that if we are being more aggressive in front of customers, presenting what we have to present, we can win more opportunities and enlarge our footprint. Regarding the financial impact last year, Tal, if you want to talk more about that.

Tal Payne

Yes. I will just say, obviously, the booking -- the commission and bonuses is affected by the amount of the booking. And since the growth wasn't as strong, as a strong as last year, then obviously, it affects the amount of the commission. That's why you see a lower number comparing to last year.

Daniel T. Cummins - B. Riley & Co., LLC, Research Division

But you don't feel the pressure to spend more to get recognition for the product commensurate with, for example, what Gartner is saying comparing Check Point to Palo Alto, you seem to be peers. I'm curious if there isn't more opportunity for Check Point to spend faster and more aggressively to maintain and gain mine share.

Gil Shwed

I think you're absolutely right and we should do more, and we are doing more. I think this year we did get a lot of improvement that -- and accessory port that gave us very high rating. We are in the Gartner a leading quadrant for all the sectors that we are playing in. The IDC has finally recognized us as the #1 vendor in the UTM and firewall shipments. That took us a long time to get that recognition even though I think we were in that position before, and I think we can do more. This is a small part of the marketing investment, and I think we can do more in that. The biggest effect on the sales and marketing is the number of sales people. And again, we have made significant investment in sales people in the last part of 2012. And I think we will see the financial impact in 2013. We saw some of it, I mean, the payroll for most of the salespeople is already in the fourth quarter of 2012, and we will see the full year effects and hopefully the commission effects of that, more of the commission effects of that in 2013.

Daniel T. Cummins - B. Riley & Co., LLC, Research Division

Okay. Guys, just a quick question about the data center landscape. First, I'm curious how many installations are still out there on Crossbeam, which was traded and sold last quarter? And if you could give us a sense of how many -- what kind of hardware deployments are you seeing with respect to those customers that may still be just acquiring software from Check Point and doing their own installation on hardware, on virtual hardware?

Gil Shwed

I think in Crossbeam -- again, I don't want to comment about their business, but as far as I understand, they are doing okay. And we are selling some of the Crossbeam equipment ourselves and some they are selling themselves. And we continue to being very, very good partners to Crossbeam and so on. The second part was about the. . .

Daniel T. Cummins - B. Riley & Co., LLC, Research Division

On third-party hardware, particularly in high-end deployments, were do you stand on that?

Gil Shwed

Third-party hardware is less popular in high-end deployments and software only. I don't know, Tal, if you have the numbers. But I think the vast majority for our business today is appliances. There is about 10% to 15% of product revenues that's coming from selling software only. Tal, is that about right?

Tal Payne

That's about right, yes.

Operator

Our next question is from the line of Sterling Auty of JPMorgan.

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

On the software blade revenue, I think in the fourth quarter last year you mentioned that the revenue was approaching 10% of total revenue. You gave a couple of metrics, but I was a little confused. Can you give us something that level sets to give us a sense of what the blade revenue was for all of 2012 so we can see what the growth rate was?

Tal Payne

I think 10% was from the software revenues. Okay, when I said this quarter in my script, it was 20% of the service revenues, but you can calculate it easily. And I also said that the software blade revenue has increased in Q4 over 35%. And total year, meaning 2012 versus 2011, it was over 50%.

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

Okay. And can you give us a sense like you did last year, when you look at, for the full year, maybe just rank order, what's the biggest revenue contributors within the blades at this point?

Tal Payne

IPS, Application Control and then antivirus and URL, probably.

Gil Shwed

Anti-Bot is picking up a few million dollars yet, but Tal gave you the right order. In IPS, for example -- and by the way, with IPS today, we have a huge installed base. I think, by now we are the largest IPS vendor in terms of installed gateway. We have more installation of IPS than all the standalone IPS vendors combined even. So I think, we've built a very nice business around that. But as Tal said, Application Control is picking up nicely, and we recently started seeing things like the antivirus and URL filtering and so on also picking up.

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

Got you. On the March quarter guidance that you gave, how should we think about the product revenue lines? We expect it still to be down year-over-year or now that you've annualized it, would it be closer to flat or even up?

Gil Shwed

I think slightly up compared to last year.

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

Okay. And then last question, I concur I like the increase in the share repurchase, but with well over $3 billion in cash, can you just update us on the status of maybe what's happening on the tax side? And why not get much more aggressive? You've had a large cash balance. While you've talked about acquisitions in the past, we haven't seen a major one. And I still think with over $3 billion in cash, there's plenty of room to be a lot more aggressive on share repurchase, as well as maybe even do some acquisition. Just walk me through kind of the approach to both of those.

Tal Payne

So, first I would say that if we -- our operating cash flow this year was $860 million. So we have a lot of cash to produce every year as you say. Our buyback right now is around $500 million but as Gil said, we can be more aggressive as well, as much as we feel is relevant and right. And so we have enough. We also have hundreds of million left from that balance from the historical cash that we can still use. So I think we have as much as we need. You're right that there is a new tax law in Israel that if we want to, and we have until the end of the year to make a decision, if we would like to use the rest of the cash, we can, subject to additional taxes that we will pay. And we will consider it.

Gil Shwed

And I think, moving forward, we are absolutely will be happy to find the right acquisition opportunities. I think that the game that I'm interested in is something that will have a lot of strategic significance, and that's not easy to find. It's -- I think it's -- there are companies that we can acquire and have for 1 year or 2 years, show a nice increase in revenues. But they won't contribute either to the strategy or to the long-term growth for us. I really want to avoid getting into this game of getting addicted to doing acquisitions for the sake of financial engineering [ph] . I'm really, really looking for the right opportunities that can have an impact and that can best fit our architecture and synergy and these are not easy to find. I can tell you that we absolutely want to do some, and we're absolutely looking for some. And I hope that in the future, we will find some acquisitions beyond small technological one, but more significant to the revenues and to the company growth.

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

All right, Gil, I think that's a good point. I think because of that challenge and that difficulty, maybe it wouldn't be a larger acquisition, be smaller, which kind of goes back to the point of with the cash balance that you have, it would seem like you could be a lot more aggressive, whether through something more one-time, like a tender offer or something else from a strategic to be able to fit both of those needs.

Operator

Our next question is from the line of Brent Thill of UBS.

Brent Thill - UBS Investment Bank, Research Division

Tal, I just want to follow-up on an earlier question on unit growth and ASPs. Can you just restate what your -- is embedded in the guidance for '13? I didn't understand the steady ASP. Can you just walk through...

Tal Payne

Sure. I think the question was, what did we assume regarding the ASP for 2013. And I said in 2012, we experienced a reduction in the ASP as a result of transition and so on. 2013, we expect stabilization in the ASP and therefore, it means that we assumed that the number of units will grow in order to achieve the guidance.

Brent Thill - UBS Investment Bank, Research Division

Okay. And just back to the guidance, I think at the midpoint, you're assuming the growth rate to be underneath, actually, the growth rate of the overall market that you're serving, the network security side. Can you just talk through, Gil, your realistic to conservative approach in the guidance this year versus last year, what -- is there a different approach you're taking in terms of the number that you're giving us free [ph] , or is this a similar forecasting methodology that you used in the past?

Gil Shwed

I think, obviously, the economy has an effect on the mood and the general cautions that we take on this year. I don't think that we've grown, in the last few years, below the industry rate. I think we've got -- we've gotten higher rates than the industry that we are serving. And I think we've taken share from some other vendors. And I hope that, that will continue to be the situation moving forward. But I think that we really need to be -- we have a methodology, looking at the economy, looking at the market growth rates, looking at our own forecast, which I think is the biggest factor collecting the feedback bottom-up from our -- the projects that we are working on. And I think so far that worked fine. I think we've been able to deliver the numbers that we wanted in a relatively -- to be a fit within our ranges in a relatively consistent way for next year [ph] . So, I hope to continue and hopefully, we will be able to surprise ourselves in the future too with some upside.

Operator

Our next question is from the line of Walter Pritchard of Citigroup.

Walter H. Pritchard - Citigroup Inc, Research Division

All right, just another question here on the unit and the ASP math. I think you said, well, we see the product revenue decline by about 5% year-over-year in the quarter. And I think you commented that units were flat and ASPs were up. And I'm just wondering what's the other variable there that drove product revenue down given flat and up ASPs.

Tal Payne

So I said it was an average flat. It went slightly down and the ASP went slightly up. So in total it brought to the -- bear in mind, you're looking at revenues, right? So there's some timing between revenues and booking. I was relating to the booking.

Walter H. Pritchard - Citigroup Inc, Research Division

Okay, got it. And then, when I think about what you -- the headwinds that you saw this year and how we should think about those next year in terms of ASPs, can you talk about where amongst the product line you saw the biggest headwinds and in terms of low end, midrange and high end, and how your confidence in terms of those ASP headwinds reversing by segment? Just trying to get another level of detail there.

Gil Shwed

I think we didn't see any headwinds that we were -- that were difficult to compete or to sell products. I think the main thing is the mix, is that customers that wanted -- that before used to pay $25,000 for a product, now said they can get the same performance, the same architecture, the same Check Point equipment and 50% more performance for $15,000. And our job is to convince these customers that they can actually benefit from the extra performance because they will utilize more software blade. And I think towards the second half of the year, we started to be able to deliver that message to customers and started seeing the ASP or the product mix starting to go back up a little bit.

Operator

Our next question is from Keith Weiss of Morgan Stanley.

Keith Weiss - Morgan Stanley, Research Division

I wonder if the thing that came up in a lot of channel conversations, and I think there's a lot of chatter in the industry about, particularly in Q4, was the idea of increased pricing pressure and network security overall. When you guys look at your business, how do you parse out impacts from potential pricing pressure versus the trade down impact that you've been talking about?

Gil Shwed

I think some of it may be the same phenomena, that phenomena of increased competition. And I think part of our job is to convince customer in the value of our product, and I think there is a lot of value. I mean, there are many vendors, our competing vendors that will come back and say, that they get so much more performance, and so on. We've actually became recently much more aggressive about that, in analyzing that. And we have very interesting signings that we've seen in the competitive landscape. For example, one vendor would only inspect the first part of the connection and will ignore the tail end of the connection, again, leaving a lot of vulnerabilities to come in when hackers find out about that. Another vendor wants us to make a lot of noise about the security of their product, actually, checks only one direction of the traffic being transferred, and the direction which has less traffic, which means that they leave 90% of traffic uninspected. So no wonder they can claim high-performance, if they only inspect 10% of the traffic. Again, I think that once more -- if these kinds of things get revealed, customer will understand the superiority of the Check Point product and why they should get more security and not try to go in the simplistic messages of get from us, more performance or things like that. And as I said, I think, we are becoming a little bit more aggressive on that. We are investing more in educating customers in the field. And yes, I think, one thing that hasn't changed in our DNA, and I think -- I hope it will continue for many years to come is we want to sell based on the merits and the benefits of our technology, of our security and not sell based on negative publicity or negative values of other vendors. I think we're trying to keep the balance here, not losing because we are not communicating the right messages. And educate the customers about the security value that they get from us, then hopefully more and more customers will get it. Obviously, we're the #1 vendor in all the fields that we're playing in. So I think obviously, the market gets that message. But definitely, we can do more and win more share.

Keith Weiss - Morgan Stanley, Research Division

Excellent, and perhaps one for Tal. When we're looking at the full year guidance for 2013, I think we have about 6% growth at the midpoint. In light of the back half of 2012 where you saw billings growth basically flat year-on-year, how should we be thinking about the mix between products and services or maybe the growth of the services piece of revenue versus product. I'd assume that services are going to be more impacted by what you put on to the balance sheet in the back half of 2012.

Tal Payne

I think, remember that, we expect or we plan for 2 phenomena. Some of them are completely mathematical, right? So we had like -- because of the transition, we had the 0 and some quarters negative growth in the product, as you've seen in Q3 and in Q4. So when we go into next year, we would like to start to see the growth coming back into the product line, right? So that's one assumption, to start to see -- we assume the ASP similar to last year, similar to 2012, and now if we succeed to increase the units, bear in mind, we're coming out of a double-digit unit growth year. So if we succeed to increase the number of units, that's the growth in the product that you will see, so that's one assumption. And the second, remember, that over time, because software blade becomes so significant and that total, it takes[ph] 20% of the revenues already, then the total amount is bigger so it's growing in a beautiful double-digit growth, but...

Gil Shwed

20% of service revenues.

Tal Payne

20% of service revenues, correct. So it's already a significant amount. So the growth rate is slowing down over time, although it's still very strong and much more of the updated maintenance growth. So by definition, there's some deceleration in the service growth, and hopefully some acceleration in the product growth that gave it up to the middle point that we provided you in the guidance.

Keith Weiss - Morgan Stanley, Research Division

Got it. So is it -- do both lines pretty much converge on that 6% growth rate?

Tal Payne

Over time, that's what I expect to happen.

Operator

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

Jonathan Ho - William Blair & Company L.L.C., Research Division

Can you guys talk a little bit about the competitive landscape and whether you're seeing either stabilization from some of the larger players that you've been taking share from, or increased aggression from the smaller players? Just want to get a sense of what you're seeing out there.

Gil Shwed

I think I did talk a little bit about some of the competitive signings that we have recently. I think some of the larger vendors, as far as I'm seeing, are not gaining ground at this point and we're taking share from them. Some of the smaller vendors, I think you know better, are doing well and are -- and they're growing. But I think when we analyze what we are doing it's not always there for the rate benefit of the customers. So I think, if I put it that way, some customers have already realized that some of the large vendors -- that we can deliver much better security and much better value than some of the large vendors, I think soon our customers will realize it more as it pertains to some of the smaller customers -- smaller vendors, sorry.

Jonathan Ho - William Blair & Company L.L.C., Research Division

Got it. And just to follow up on sort of your comments around the reversals and some of the trade downs that you're seeing, and that trend in the third or fourth quarter. Can you just give us, by rank order, what are some of the reasons why people are going to trade up? Is it increasing network speeds? Is it just that performance requirement? What are some of the other factors, certifications, that could weigh in, in 2013 to support that trend?

Gil Shwed

So first, I mean, network performance is always a factor. And that's -- there's always the assumption in technology that you need more bandwidth, you need more effect [ph] . The main reason we were thinking of this customer will need more is because they will activate more software blades. And the role performance versus the real world performance for our products as well as all other products in the industry are very different. And we'd like to encourage customers to use more and more software blades and get more security. That's why they are buying the products for. And that's where they need more and more power and that's when I think we will prove to them, with our SPU security power units measure and so on, how much we will show them, how much they need, how much room for growth they got, so they can keep the same hardware for a longer time and activate more blades on the same unit that they buy in the future. And how it competes effectively against other products in the industry as well.

Operator

Our next call -- question is from the line of Tal Liani of Bank of America.

Tal Liani - BofA Merrill Lynch, Research Division

I have 2 questions. First one is what is the percentage of appliances as a percentage of sales? I'm trying to understand why we haven't seen already acceleration of growth if the percentage of appliance -- sorry, the percentage of new appliances went up from 0% to 80% in the first 3 quarters of the year, and from 80% to 90% in the last quarter of the year. This 10% is so smaller than what we've seen before, you should have seen acceleration there. So maybe the explanation is that appliances are a smaller part than I thought, as a percentage of product sales. So if you can give some color there. Second question is about service revenues. We have seen declining product revenues in the last 2 quarters. Does it translate into weaker than -- weaker growth rate in service revenues for the next 2 quarters, given the lag in recognition between products and services?

Tal Payne

I didn't understand the math in the first part of the question, and I didn't understand the second question. So if you help me, if you will repeat it.

Tal Liani - BofA Merrill Lynch, Research Division

Okay. So the first question is just about what is the percentage of revenues that you generate from appliances in products? So what...

Tal Payne

So that actually didn't change -- sorry, so that didn't change significantly throughout the year. But we did what -- your comparison in the terms of the total booking is year-over-year. So last year, it was the majority of the year, the old appliances. This year, majority of the year, was the new appliances. So all the quarters pretty much suffered from the same phenomena.

Gil Shwed

And I would like to add also that our appliances, which is a core of our business, are actually doing quite well and are growing. The parts that are actually more, I wouldn't say shrinking or eroding, it's not shrinking, it's more eroding, is actually the non appliance part of our revenue line. So if we got software-only revenue to be sort of freezing or eroding a little bit, the -- a little bit of appliance growth actually pays out for this. So in the appliances themselves, we have good numbers there and not declining by any means.

Tal Liani - BofA Merrill Lynch, Research Division

So -- but what is the percentage of appliance? Is the majority of the revenues, appliances or other things?

Gil Shwed

No, no, the product revenue, the majority of that is appliances and...

Tal Payne

Best said, the majority of it is more than 80%.

Gil Shwed

More than 80% of product revenues today is appliances.

Tal Liani - BofA Merrill Lynch, Research Division

Okay. The second question is about the service part. Given that service recognition is more ratable than products, when you see a decline in product revenues in 2 quarters, does it mean that service revenues decelerate, the growth decelerates after tax? So kind of a delayed impact, or it doesn't?

Tal Payne

Yes, I understand what you're saying. So definitely, you see it already for the last 2 quarters, right? You see, if you look at the revenue from services, you see that it's reducing every quarter slightly. And that's why I said that I expect that to continue not only because if you don't have a growth in the product, then you don't get new attachments for the new product, but also because software blades growth is slowing down, still significant double-digit but slowing down. And therefore, the total service growth is reducing over time.

Tal Liani - BofA Merrill Lynch, Research Division

Got it. Are we going to have -- do you expect the next 2 quarters to get much worse because of the trends in product revenues the last 2 quarters? I'm just trying to understand if for the next 2 quarters, we have more substantial decline in service revenues or it's more smoother than what you see on the product side.

Gil Shwed

I expect product revenues to show more growth in the future quarters.

Tal Payne

Yes, I agree. Remember the service line Q1 can be sometimes similar to Q4 because Q4 enjoys typically a big portion of professional services and training, and so on. So I don't expect anything dramatically different.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session, and we have time for one final question. The question is coming from the line of Philip Winslow of Credit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

I just wanted to get a sense for what you're embedding into your 2013 guidance for the blade growth. I mean, obviously you talked about very healthy [indiscernible] kind of, as you're looking into '13 how you're baking that in so sort of in the context of the other questions here related to obviously your service growth and then unit growth.

Tal Payne

So it's as I said, we expect it to continue to be strong with double-digit growth.

Philip Winslow - Crédit Suisse AG, Research Division

Got it. And then also just finally on the deferred line, I know you guys don't talk a lot about this in terms of billings. But just we've seen a little bit of a downside of that in the past couple of quarters versus consensus, I mean, how should we think about that ratio or that mix going forward into '13, kind of versus what we saw in '12 and '11?

Tal Payne

The growth of what, of the deferred revenues?

Philip Winslow - Crédit Suisse AG, Research Division

Deferred revenue, yes.

Tal Payne

So I said because revenues can fluctuate easily between quarters. I don't have a better assumption to you than a similar growth to the revenues growth. And also, remember the following, it typically goes down in Q1, goes down in Q2, goes down in Q3 and then go up in Q4. So I would keep the same phenomena.

Gil Shwed

Thank you very much.

Kip Meintzer

Thank you for joining us, guys. We'll talk to you soon, I'm sure. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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