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Check Point Software (NASDAQ:CHKP)

Q1 2014 Results Earnings Conference Call

April 29, 2014, 8:30 a.m. ET

Executives

Kip Meintzer - Investor Relations

Tal Payne - Chief Financial Officer

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

Analysts

Gregg Moskowitz - Cowen & Company

David Kaplan - Barclays

Daniel Ives - FBR

Aaron Schwartz - Jefferies

Brad Zelnick - Macquarie

Matt Hedberg - RBC Capital Markets

Walter Pritchard - Citigroup

Gray Powell - Wells Fargo

Karl Keirstead - Deutsche Bank

Michael Turits - Raymond James

Greg Dunham - Goldman Sachs

Keith Weiss - Morgan Stanley

Tal Liani - Bank of America

Phil Winslow - Credit Suisse

Scott Zeller - Needham & Company

Shebly Seyrafi - FBN Securities

Operator

Greetings, and welcome to the Check Point Software Technologies first quarter 2014 earnings call. [Operator Instructions] 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, operator. I'd like to thank all of you for joining us today to discuss Check Point's financial results for the first quarter of 2014. Joining me on the call today are Gil Shwed, Founder, Chairman and CEO; along with our Chief Financial Officer, Tal Payne. As a reminder, this call is being webcast live on our website and is being recorded for replay.

To access this 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 May 6. 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 with management's presentation, I'd like to highlight the following items. During the course of this call, Check Point representatives will make certain forward-looking statements. These forward-looking statements may include our expectations regarding the introduction of new products, programs, and the success of those products and programs, our expectations regarding capital expenditures, our expectations regarding our business and financial outlook, including with respect to the tax rates and currency exchange rate fluctuations.

Other statements, which may be made in response to questions, which refer to our beliefs, plans, expectations, or intentions, are also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Because these statements pertain to future events that 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, which is on file with the SEC and is available on our website at www.checkpoint.com.

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 of such results, as well as the reasons for our presentation of non-GAAP information.

With that, 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. Good morning and good afternoon to everyone joining us on the call today. I’m happy to begin the review of the first quarter. Revenues increased by 6% year over year, while non-GAAP EPS grew 6% to $0.84, coming in toward the high end of our guidance.

Before I proceed farther into the numbers, let me remind you that our first quarter of 2014 GAAP financial results include stock based compensation charges, amortization of acquired intangible assets, and the related tax effects. Keep in mind that non-GAAP financial information is presented excluding these items.

Now let’s take a look at the financial highlights for the quarter. In the first quarter of 2014, our revenues reached $342 million, compared to $323 million in the first quarter of 2013, representing an increase of 6%. Revenues were in the upper half of our guidance.

Total product and software blade subscription revenues represented growth of 10% year over year. This growth was driven primarily by the continued success of our software blades, which now represent 18% of our total revenues. Revenues from software blades subscription grew 26% year over year, reaching $60 million.

In addition, the success of our data center products, the 13000 and the 21000, as well as our lower end products, the 600 and the 1100, contributed the overall product growth.

Our software update maintenance revenues reached $173 million, representing a growth of 2% year over year.

Deferred revenues as of March 31, 2014 were $660 million, an increase of $74 million, or 13%, over March 2012.

Revenue distribution by geography for the quarter was as follows. The Americas contributed 48% of revenues, Europe contributed 36%, and Asia Pacific/Japan, the Middle East, and Africa region contributed the remaining 16%.

In Europe and in Asia, we experienced a slow start to the year, while North America had very good results. Specifically, we had over 20% product sales growth in North America, the most competitive marketplace.

Transactions greater than $50,000 accounted for 66% of total order volume, which was similar to the same period a year ago. We had 36 customers with transactions greater than $1 million. Our non-GAAP operating margin this quarter continued to be strong at 58%.

Our effective tax rate, GAAP and non-GAAP, for the first quarter was 20%, as in the first quarter of last year.

GAAP net income for the first quarter of 2014 increased to $153 million from $148 million in the first quarter of 2013. GAAP EPS increased to $0.78 from $0.73 per diluted share in the same period last year, representing 7% growth year over year.

Non-GAAP net income for the quarter was $164 million or $0.84 per diluted share, up from $159 million or $0.79 per diluted share in the same period a year ago. Non-GAAP earnings per share came in at the high end of our guidance, representing 6% growth year over year.

Our cash from operations this quarter was $172 million, compared to $331 million in the first quarter of 2013. This quarter, we made the second settlement payment to the Israeli tax authorities. Last year, in the first quarter, we had a significant refund from the tax authorities.

Net of the transactions relating to prior years, our operating cash flow actually increased by 13% from $252 million to $284 million this quarter.

Collections continued to be strong, with DSO of 63 days, lower than the previous quarter.

We began implementing our expanded share buyback program during the quarter and repurchased approximately 2.8 million shares for the total cost of $183 million. We expect the number of average shares for the year 2014 to be approximately 193 million shares compared to an average 200 million in 2013. This reduction takes into account the increased buyback on the one hand and the increased share price on the other hand.

Our cash balance reached $3 million and $662 million at the end of the quarter.

Now, let’s turn the call over to Gil for his thoughts on the quarter.

Gil Shwed

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

We delivered some nice metrics for the quarter: 10% growth in combined products and blade sales and EPS at the high end of our projection. Price this quarter came from our data center appliances, the 12100 and the 13500, which continued to do extremely well.

We see many customers moving up to the 13000 appliances from lower end models, based on its exceptional performance and attractive price. Our small and branch office appliances, the 611 and 1100 models, also continue their fast-paced growth, but the real proof of the success of our architecture is in the growth of our software blades.

Our software blades provide the most advanced protection against new threats, and our offer is an annuity subscription. This is the first quarter we’ve broken out the software blade revenues, now that it has become a significant item. Software blades generated $60 million in revenues this quarter and 26% growth, a significant contribution to our business and its growth.

And the software blades are only the first building block in fighting the continually evolving cybercrime environment. In order to fight today’s security threats and be ready for the security challenges of tomorrow, you need more than just good technology. You need the ability to fight multiple threat vectors at the same time. You need a modular and programmable architecture that can adapt quickly to the changing security threats. You need security intelligence that discovers threats and protects the environment in real time, and you need the ability to control and manage it in a combined and effective manner.

This is the driving force behind the software defined protection architecture, or SDP, that we will offer this quarter. SDP enables us to build a security environment today to fight future cyber threats. SDP is based on three layered architecture, an enforcement layer which is fast and agile, a control layer which makes sophisticated security decisions based on up to date security intelligence from our threat cloud, and the management layer that enables each customer to define policies and monitor their entire enterprise security.

In the second quarter, we’ve already translated the principles of this architecture into new products, starting with the new Smart-1 management appliances that deliver three times more performance and provide a platform for a future management architecture; our new SmartEvent security analysis product, which utilizes big data event analytics technologies to present attack information; and the new 41000 appliances, which make super high end security available to more customers.

We continue to tackle the most challenging security threats. Our recently announced ThreatCloud threat emulation service is continuing to provide great results in tackling zero day attacks. This was evident in a recent test we published this quarter showing the significantly higher catch rates for unknown threats compared to other products in this space.

So, overall, I believe that we are innovating and executing well on building the future architecture for security. This brings me to the financial outlook. You know my regular caveat. It’s always hard to predict the future. And specifically, this quarter, when we analyzed the first quarter, we experienced good results with very healthy product growth in North America. However, we saw some softness in international markets, especially Asia.

Some of this can be attributed to macroeconomic conditions in specific countries, and the rest to slow start of the year following our very strong fourth quarter. When we look now into the second quarter, we see on the one hand the healthy pipeline and the strong forecast by our sales force. On the other hand, I want to be cautious giving some of the trends in the first quarter.

So taking these items into consideration, we are expecting good results, but we’d also like to expand the normal range of our projections. So, for the second quarter, we expect revenues in the range of $340 million to $375 million and non-GAAP earnings per share in the range of $0.82 to $0.90 per share. GAAP EPS is expected to be approximately $0.07 less.

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

Question-and-Answer Session

Operator

[Operator instructions.] Our first question today is coming from Gregg Moskowitz with Cowen & Company.

Gregg Moskowitz - Cowen & Company

Thanks for the wealth of additional transparency on the software blades. At 18% of total revenue this quarter and over 25% in recurring, certainly they have become material. I’m wondering where the blade strength came from this quarter in terms of new business, if you could talk about that, and then just also how renewal rates were this quarter.

Gil Shwed

Actually, all the software blades grew pretty well. Overall, it’s from all the blades.

Tal Payne

Just in terms of order, IPS is the biggest one, I’ll remind you, then application control. URL filtering, anti-bot is doing very well. So, like Gil said, it’s pretty much across all blades, which was very nice to see.

And on renewal rates, actually we don’t disclose renewal rates, I’ll remind you, because we said as an absolute number it doesn’t reflect much. But in general, we saw an increase in the unbundled renewal rate.

Gil Shwed

And by the way, keep in mind that most of the growth actually came from the unbundled blade. The bundled blades are attached to the new appliances we sell, so actually most of the growth came from customers who actually decided to purchase the blades and renew our blades, which is great news. So that’s the highest growth rate.

Gregg Moskowitz - Cowen & Company

And then Gil, you mentioned that Europe and Asia each had a slow start to the year. And it sounds like certainly more over in Asia, which is not the first we’ve heard of that. But I’m wondering if you could give some insight into what you’ve seen there possibly in March and April, just to get a more recent status of how things look from your vantage point.

Gil Shwed

I think it’s hard to predict the future. In Asia, we had for a few quarters some slowness. A lot of it is the direct result of the currency changes and the economies in Asia. Europe actually had a very strong fourth quarter and very high growth in product sales in the fourth quarter. So no wonder it had a slow start for the year. Or a soft one. I wouldn’t even say slow. We do have a very good pipeline for the second quarter in that, so I don’t know if Europe is set now to show great results in the second quarter or not. That’s left to be seen.

Tal Payne

And to your question about April, remember we see very little in April anyway, so you can’t read too much into April anyway.

Gregg Moskowitz - Cowen & Company

And just one last one, if I could. I just wanted to ask about the 2014 guidance. I think previously you were expecting $1.45 billion to $1.5 billion and on EPS, $3.50 to $3.70. Is there any change to the expectation for the full year?

Gil Shwed

No, no change. The same.

Operator

Our next question is coming from David Kaplan with Barclays.

David Kaplan - Barclays

Maybe just a quick question specifically on the threat emulation blades. You guys mentioned in the press release that through some proprietary testing or some testing you guys had done on your own, that it seems to have done well. There was also a very highly public NSS report on the [BDS], which some of your competitors ranked high, and you guys were not in that one. So give us a little bit about what testing you guys did, why you weren’t in that one, and how your threat emulation blades do compete or do compare to the other sandboxing solutions that are out there.

Gil Shwed

First, we are participating in many NSS tests, and I think we scored very well in NSS tests, and we will participate in future NSS tests when they become relevant. However, specifically if I compare our tests to the tests they conduct, these are very, very different tests. What NSS did is a test - which, again, I’m not undermining it or anything, I’m just explaining the differences - of finding an attack after the fact. They actually gave each vendor 48 hours to find the attacks.

Our tests and what we are trying to do is true real-time prevention. So we are testing the files on the fly, and we are responding in real time. So we don’t let the file go through. In their tests and in other products, they let the file go through and later on notify the security administrator that malware has entered the network.

In our case, what we’re doing is very different. We’re testing each file in real time and stopping the bad files. Now, what we’ve done in our test, which is also the new test methodology, we took several hundred known attacks and modified them slightly, which is exactly what a new attack would do. They’ll take an attack, they’ll make small modification to it, and send it through.

We were quite surprised with what happened, because we were talking about threat emulation. Threat emulation is exactly what it needs to do, not look at the signature of an attack and identify the attack based on the history, but look at its behavior and decide whether that behavior is bad. Our product actually did that well. I think you saw the statistics, 99.83% catch rate. So we pretty much caught everything.

Other products, we were also quite surprised, because the catch rates were much lower. We’re talking about 25%, 50%, and even 75%, but that means that the catch rate for these other products relies more significantly than you might expect on signature than the actual behavior.

So this is the different tests. And again, in the future we will continue to participate in more industry tests, and we are going to also, by the way, take our test and make it more public or conducted by third parties. I think the test methodology they did is the right one, it’s a very fair one. We’ll be very, very happy with more people using it.

David Kaplan - Barclays

And then just a second question on the seasonality of the business. Are you seeing any change in the seasonality of the business? We’re used to a lot of it already, and some of your competitors also had a particularly strong fourth quarter. So are you seeing any changes there or anything that we should think about in terms of how we build out our models over the course of this year?

Tal Payne

I can tell you what we’ve seen. You saw, like when we published the Q4 results in January, Q4 was significantly stronger than Q4 the year before. So maybe you can conclude from that, which I think it might be too early to say, that there’s more dollars even spent in Q4, and therefore it creates some weakness in Q1. Maybe. Because they eat all the budget, and therefore it’s lower Q1. I don’t know, maybe it’s too early to say that.

Gil Shwed

I would say generally, if I look at the trend, it’s not a trend that changes necessarily overnight. If I look at the last few years, we are seeing more typical enterprise buying patterns, which means quarters are more back end loaded, the year is more back end loaded. Very different than what, let’s say, I had 10 years ago, when things were much less back end loaded and much more uniform in distribution.

Tal Payne

And you saw it, by the way, also in 2013. The first half was much weaker than the second half. So maybe it’s intensifying.

Operator

Our next question is coming from Daniel Ives of FBR.

Daniel Ives - FBR

Gil, in regard to security spending overall, maybe you could just talk about the difference that you’re seeing, maybe even year over year, if you compare it over the last few years, in terms of just security spend maybe going more to the boardroom, more strategic, and how that’s changing field conditions for you guys, especially on the high end?

Gil Shwed

I still don’t think that security is becoming a board issue for most companies. I do feel that we’ve seen a nice, healthy demand. We have a very strong pipeline for the quarter. So I think overall the demand is positive. I think we do see a lot of the [unintelligible] consolidation in the marketplace. Customers would like to have less vendors and unify their purchases, and unify their environment from less vendors, which I think is a very good trend for us. So this is the general trend that I’m seeing.

Daniel Ives - FBR

And in terms of the cash situation, outside of you guys buying a country, are there any thoughts in terms of just buyback, increase M&A, change in strategy?

Gil Shwed

I think we’ve definitely intensified our M&A work, and we’re seeing more companies and more opportunities. Not that it makes it much easier to find the right and good opportunities, but we’ve definitely intensified in the last two quarters. Buyback we did expand this quarter, and we significantly grew the buyback program by like 50% this quarter. And we’ll keep looking at all the options to utilize the cash, mainly to grow the business.

Tal Payne

And maybe just to clarify, the reason I mentioned in my script the number of shares is because we increased significantly the cash we spend on buyback. If you remember, last year the average was $136 million a quarter. Now it should be up to $200 million.

And this quarter, we had, on a cash basis, $186 million. So we used almost all the cap. But yet in the number of shares, remember that last year shares were around $50. Now we are in $66.70, so you purchase less shares.

So in total, we expect the number of shares obviously to continue and reduce, but to the average for the year, it will reach around $93 million, because I saw some of you assumed a larger reduction. So you need to take into account also the share price increase.

Operator

Our next question is coming from Aaron Schwartz from Jefferies.

Aaron Schwartz - Jefferies

Thanks for the additional color on the guidance. I was just wondering if you could walk through that a little bit more in terms of what gets you to the low and high end. Is it fair to assume that if the Americas continue at the strength you just saw, and there’s no pickup in international, is that sort of what dictates the low end of the range? Or could you just kind of walk through how you think about the range?

Tal Payne

Americas obviously had a very strong quarter, as Gil said. So for the Americas, we will continue to have strong quarters going on into Q2. We talked about double digit, and I said over 20% product growth. That’s quite significant. So that’s one hand, which is great, which is Americas. In Europe, we saw some softness, but bear in mind that we were very strong in Q1. In Q4, if you go back to Q4, it was very strong. So it depends. It will continue to be weak this quarter, which will go back to the regular rate and become stronger. If it will become stronger, then we should be within the range.

Aaron Schwartz - Jefferies

And on the tax adjustments to the cash flow, thanks for providing that in the press release. Are there any other items to think about this year? Or are the one-time tax payments that are sizable pretty much behind you at this point?

Tal Payne

Pretty much behind us.

Operator

Our next question is coming from Brad Zelnick from Macquarie.

Brad Zelnick - Macquarie

Gil, I appreciate Check Point’s approach to security has always been software defined, but as the network architecture moves in your direction, I was curious if you could just talk a little bit about how it impacts the business, not only from a product perspective, but even more so how you’re thinking about partnerships, channels, and go-to-market, or even customer purchasing behavior. Do you see it becoming less cyclical, less tied to a hardware refresh? I was hoping you could just share some of your thoughts there.

Gil Shwed

I think the market today is very sophisticated. It’s not uniform. Because it’s a more mature market, I think the buying behavior is very different. I mean, some customer are tying it directly to a hardware purchase, many customers are buying the software value separately.

I think by breaking out the software blade revenues, between them, you can clearly see that we have many customers that are unbundling their appliance or metric infrastructure from the actual security value and the actual security functionality they’re buying on top of it, which is the direction we are aiming it.

We clearly want to show customers if they buy from us an appliance, they buy a platform, and on this platform they can put a lot of more security value. And again, I think the main challenge today is that when we’re talking to customers, we don’t see one silver bullet. If we do that, then everything would be great.

Different customers want different things, and there are so many different functionalities. I think we are excellently fulfilling that, and we are very well-positioned to fulfil that with the software blades architecture, but it’s not one task to fulfil all the customer needs, or most of the customer needs.

Operator

Our next question is coming from Matt Hedberg of RBC Capital Markets.

Matt Hedberg - RBC Capital Markets

I guess a follow up to the last one. In the quarter you announced Check Point Virtual Edition. It looks like it’s a collaboration with VMware to secure private clouds. Can you talk a little bit more about that opportunity? Really, I think the larger opportunity is in the software defined as [unintelligible] space, certainly as the market pivots towards software.

Gil Shwed

Clearly that’s a good thing for us, the fact that the market is going towards software. First, that’s our strength. Second, if you look at the virtual environment, our software is software so we can put it anywhere on the network. We can put it on virtual servers, we can put it in cloud environments, and that’s very natural to us, unlike most of our competitors that rely on proprietary hardware and for them, moving the software to different places is more difficult.

Furthermore, if you look at things like SVN, that architecture is actually, I think it would be very, very good for us, because what many people don’t see is that it enables rerouting the software to many network services.

And one of these major network services can be security. Now I can have two people sitting on the same floor on the same physical network, which are getting two different security compartments, which is the situation. One person behind, let’s say, the [science] network, and one person behind the guest network, and people that are connected together to the network.

So the SVN architecture clearly, the whole [unintelligible] virtualization is something we should benefit from. I must say that this very, very early stage, and most security deployments today are still done in the more traditional way. And we’re absolutely looking forward to the expansion of the security in the new environment.

Operator

Our next question is coming from Walter Pritchard with Citigroup.

Walter Pritchard - Citigroup

Gil, I was wondering if you could talk about the data center strength that you saw, and I think a number of your competitors have released products in that area as well, and have seen some strength. I’m wondering is that a market that you believe is just growing significantly ahead of where the overall space is growing? Or is your new entry in that market enabling you to gain share? Or is there some other factor that’s driving your growth and what seems to be the market growth in that area?

Gil Shwed

I think there are many segments of the market, not just one, and I think there are many upside opportunities. I think what we are seeing here is that the customers on the higher end of the spectrum, if they get the right value for their money, they’re [unintelligible]. So I think if you look at our data center clients, they are to date the biggest segment dollar wise of our appliances segment, very small in terms of units. Let’s not get mixed on that. It’s the highest dollar contributor, and still only a few percent of the overall units that we ship.

These customers, if they get the right value, they’re willing to spend, and I think with our 21700 and 13500, we are showing that we can deliver a very good price performance, very good quality build for the appliances, and customers are buying into it. And what we’ve seen is that in some cases it helps us win new accounts and new projects.

In other cases, customers that before both one level below [unintelligible] appliances, simply decided to spend a little bit more, spend 20% or 30% more, and buy something with twice the power, which is also important, because I think the more security power people put on their network, the more security capabilities they can activate, which is exactly the direction they should use to not just use it as a basic firewall like they did many years ago, but use all the software blades and use all the new functionalities of security, which we all need on our network.

Operator

Our next question today is coming from Gray Powell from Wells Fargo.

Gray Powell - Wells Fargo

Do you see APT or sandboxing solutions creating new budget within network security, or do you see it taking budget from [unintelligible] solutions? And if it is taking budget from [unintelligible] solutions, what do you think of that risk?

Gil Shwed

I think today the security budget is still fairly small for most companies. And I think when people want to get additional budget, they can get additional budget. I think it varies by organization. Some organizations have very well established budgets, and it’s a game of switching the budget between categories. Most organizations, the security purchase is based on the need. It’s still, let’s say, 1% to 5% of the IT budget.

In a company which has even a significant IT budget, but not huge, let’s say a $10 million budget, security budget can be $100,000, $200,000, $300,000. It’s not something that’s too difficult to increase when there is a need. And I think where we are trying to show our value is showing that customers can get better security, they can get it within very tight budgets, because when you put more software blades with the same equipment, or in the case of the threat emulation is getting the service from the cloud, so in many cases it doesn’t require any equipment to run it on, they can get the highest level of security I think in quite reasonable budgets.

Operator

Our next question today is coming from Karl Keirstead from Deutsche Bank.

Karl Keirstead - Deutsche Bank

If I could just focus on that 20% product growth in North America, very strong. Could you offer a little bit more color as to what drove that? Were there any particularly large deals? Was there anything in the macro? Did you see any kind of refresh activity pick up?

Gil Shwed

I think it’s mainly healthy pipeline in mid-sized deals. We didn’t have any increase in large deals, so it didn’t come from large deals, it came from middle sized deals. I think large deals in the Americas were kind of at the same level as last year. So all the growth came from midsized deals and just more of them, which for me it is an excellent sign, because that creates more opportunities for the future, more customers, more market share, which are all I think the important things in [unintelligible].

Karl Keirstead - Deutsche Bank

And on the softness in Asia Pacific in particular, are you attributing it entirely to macro, or is there anything that in your judgment goes under Check Point’s control that you might tweak the sales process, make any kind of change?

Gil Shwed

I think we always can do better, and I think we’ve pretty much now replaced most of our management in Asia. We are adding more sales people and changing that. I think part of it is part of the economy. When people are seeing that times are tough, some people have a hard time functioning under that pressure, some people do. But I think there’s definitely more things that we can do to control it, so I’m not trying to blame the economy solely. I’m just trying to say the background for what we are doing. And we are always seeing that it is our responsibility to produce better results, and we are doing a lot of that.

Operator

Our next question is coming from Michael Turits of Raymond James.

Michael Turits - Raymond James

You’ve said that you were anticipating Europe coming back in Q2 to get to the midpoint of the guidance. What are your assumptions for Asia? Do you assume that that will come back to get to the midpoint? Or can that stay where it was?

Tal Payne

I can’t explain here how we do the forecast, I’ll remind you, and we’re definitely not going to do it by geography. I can remind you that in general we take the forecast from the field, we take the history, we take sequentially what we have seen, and based on that, we create a range. All we said is that North America was very strong, which is a great indication, and Asia continues to be weak, and Europe is somewhere in the middle, following a very strong Q4. And we just provided a bigger range.

Michael Turits - Raymond James

And then you talked about this year increasing your investment in opex around some new products, like threat emulation, more marketing, SMB, recruiting. Can you give us an update on that in terms of where that spending has gone so far, and anything we can do to measure, whether it’s headcount, growth or anything you can talk about, and then where you might be starting to see a return on that?

Tal Payne

Sure, you can see that the margin didn’t go down, which means we just started, and we’ve continued to increase throughout the year.

Gil Shwed

I think we also, a lot of that expansion started to happen last year. So today we started the year with much higher average headcount than we had last year, and we still want to invest more. We still want to add more, but a big part of it is we already started the year with a higher level of headcount and a higher level of investment, especially in sales.

Michael Turits - Raymond James

Cash taxes obviously had the second big payment to the Israeli tax authority this year. If I look into 2015, if I ex out that tax payment, should I think of the cash tax rate percentage, whether GAAP or non-GAAP, pretax being the same going into next year, ex the one-time payment this year?

Tal Payne

Pretty much. Like this year, because remember, this year the taxes in Israel increased, if I recall, to 16%. So if I would have had to make a quick calculation how much would be the cash payment, probably around somewhere there, 16%, slightly more. You know, around 16% to 17%. Maybe that’s the cash payment.

Gil Shwed

And I just want to reiterate one point. I think it’s probably obvious to all of you. All the tax payments which we are talking about have an effect on the cash balances. In the P&L, I think we didn’t have any effect. We didn’t record any one-time hit or anything on the P&L. It was all I think managed well by the finance team here.

Michael Turits - Raymond James

No, I understand it’s all on the cash side. But bottom line, this year, for 2014, the cash tax rate ex the one-time payment should be about 16% and it should be about 16% next year in 2015?

Tal Payne

That should be the range. I mean, our P&L rate is 20%, and I said that’s pretty much the range. So in previous years, you had a higher provision for taxes and lower cash payments. Because if you remember, the tax rate in Israel was much lower, but there were a lot of tax risks associated. Now it’s pretty much much lower tax risk, and a slightly higher tax payment. So it should meet somewhere in the middle. So probably somewhere between the 16% and the 20%.

Operator

Our next question is coming from Greg Dunham from Goldman Sachs.

Greg Dunham - Goldman Sachs

Just one from me, and it follows up on that question. I just want to make sure that I heard that the adjusted March cash flow from last year was $252 million from operations? And then if you make that adjustment, then the normalized cash from operations in 2013 was $710 million, if you adjust for that. Is that the right base to grow off of when you look at cash flow from operations for 2014?

Tal Payne

We’re just talking now about Q1. So there was also in Q4 last year a significant tax payment. If you remember, we had the settlement with the tax authorities, and the settlement was made in two payments. One payment was in Q4 last year, and one payment was in Q1 this year. The second thing that was an extraordinary, I will call it, was that in Q1 last year we got a refund from the tax authorities. So when you look at 2014, you can definitely look at the $284 million, right?

Gil Shwed

That was for the first quarter.

Tal Payne

Right. Because if you eliminate the [unintelligible] with the prior years, we increased from $252 million to $284 million. That was in our numbers.

Greg Dunham - Goldman Sachs

And I guess just to ask it in a more simple way, when you look at last year’s $790 million, you got a $79 million benefit in March. What was the hit in December, and what would that $790 million adjusted do?

Tal Payne

Again, in Q1 last year, we had the refund. In Q4 last year, we had the tax payment to the tax authorities. And if you look at the Q4 transcript, you will be able to see the exact amount. I don’t have it in front of me.

Operator

Our next question is coming from Keith Weiss with Morgan Stanley.

Keith Weiss - Morgan Stanley

Two real clarification questions. One for Gil. When we’re speaking about moving towards more of a software focus, is this something that we’re expecting on a going forward basis, or is this something that you’re seeing in sort of customer purchasing behavior today in terms of the percentage of purchases that are coming on appliance versus virtualized platforms or just a software only basis? And then I have one follow up for Tal.

Gil Shwed

First, I think in the past our sales were only software. It’s only in the last five or six years that we’re selling appliances. I don’t think customers look at it as a hardware or software. I think customers look at it as what’s the best way to secure our network. I think today most of these are based on appliance platform, but I think we are clearly showing on the software blades that we can shift more revenues towards fewer software when the value was there. And in the future, I think some of it will continue. I think the customer will see the added value of the software.

Keith Weiss - Morgan Stanley

Got it. It’s just more of a perspective comment that software value continues to grow and going forward people might shift more to it, back towards a full software solution.

Gil Shwed

That may happen, yes.

Keith Weiss - Morgan Stanley

And then for Tal, I don’t know if you delved into the FX impacts this quarter in terms of the revenue [unintelligible], if there was anything significant this quarter?

Tal Payne

Last year, you remember that the rate in the beginning of the year was around 4 shekels for the dollar. Now we are around 3.475. So I would say the impact right now is around $0.01 on the EPS, for the first quarter.

Keith Weiss - Morgan Stanley

On the expense side of the equation?

Tal Payne

Yes, from the expense side. Obviously, from the income side, it depends on the currency. So that’s why we said in Asia, the currencies are not that great, and therefore it’s affected their budgets. We talked about it in the previous quarter, and it didn’t improve significantly since then. So I think that had some impact on the customer budgets in Asia, which affects their buying power.

Keith Weiss - Morgan Stanley

And when you guys see something of that ilk, is it possible that you’ll have to go and adjust your pricing to sort of match to the currency on a go forward basis? Or is it just something that you wait for it to normalize through and just you’re going to have to get used to their reduced buying power?

Gil Shwed

I think generally we are waiting. [unintelligible] in almost all countries except Japan or in U.S. dollars, but obviously, when the environment needs, let’s say, an extra discount to close the project, we might give it, if that’s the right thing to do.

Operator

Our next question today is coming from Tal Liani of Bank of America.

Tal Liani - Bank of America

First, the long term deferred revenues were up strongly. Can you discuss the components of long term deferred revenue and the components of the growth?

The second question is about kind of longer term, you’re guiding roughly, give or take, if I take the midpoint, about 6% revenue growth, and you’ve grown 6% year over year this time. Your long term guidance is 10%. What do you do in terms of strategy, products, go-to-market? What do you do in order to drive up growth to that level?

And the third question is about the board meeting you have in May. And typically if there’s any buyback decision or dividend decision, if I’m not wrong, it happens in May. And I’m wondering, now that you paid the taxes to the Israeli authorities, and the cash flow is very strong, what is the difference this time versus previous times, in your view, on dividend pros and cons? Is there any change, and does the different tax situation drive you more in favor of dividends?

Tal Payne

I have to say, I remember question one and three, I don’t remember question two. So in terms of long term deferred revenue, like I always say, I say it’s sequential. It can fluctuate between quarter to quarter. Sometimes, the customer has a budget, and he would like to put in an order for the updated maintenance three years in advance, or two years in advance. We split between the short term and long term, so you [wouldn’t] be able to see it.

But there’s not much to say about it. It really depends on the customers and their budgets. And you say it moved up, but I didn’t talk about it, because when it goes down, I tell you you shouldn’t read too much into it. Also, when it goes up, you shouldn’t read too much into it. It just means a healthy budget, so people maybe use it to put in an order for two or three years in advance. So that’s one. But nothing really dramatic to discuss.

In terms of the board, actually the release of the [unintelligible] income, as we call it, already happened before the last board, so that discussion already happened. And the result of the discussion was that we increased our buyback significantly from the $500 million last year to up to $200 million a question, which means around $800 million a year, which is pretty close to our cash flow. So this is behind us, and we already had the board, and we already communicated the results of that.

I’ll just remind you, in terms of buyback versus dividend, we survey with our investors, and the majority by far prefer buyback. So we went with the buyback.

Gil Shwed

And [unintelligible] what we are doing strategically to increase the growth rate, I think there are so many things we are doing, but I tried to address some of them, like the SDP, the software defined protection architecture, like more software blades, which will address more spaces like the threat emulation, the anti-bot, the VLP, and of course, longer time ago, the application control, the IPS.

So what we are clearly showing is the results of our increasing our growth rate. And we will come up with more software blades [unintelligible], but I think combining the platform with the more blades, I think clearly has a role in driving the consolidation in the marketplace and increasing our own growth rate.

Tal Liani - Bank of America

Is there anything you need to do also on the go-to-market side?

Gil Shwed

Yes, and I think we are also making changes and improvements in many of our go-to places and areas.

Operator

Our next question is coming from Phil Winslow with Credit Suisse.

Phil Winslow - Credit Suisse

Just wanted a little bit more color on maybe what you’re seeing between small and midsized businesses and larger enterprises, just in terms of the quarter, just what your thoughts are kind of as you look at your pipeline for the year?

Gil Shwed

I think we serve all segments. I think we’re very happy to see that we have a little investment in the segment of small business, as it’s growing very fast. I think we are investing more in that, and we want to build a significant sales force to address the small businesses. Clearly, our product, which doubled year over year, shows that there is a potential to that, because I think we do have the best product today for small businesses in the marketplace.

I think in the data center and higher end customers, we’re also seeing a lot of success. And at least this quarter, a lot of success came from mid-range customers, not just from the two ends of the market. So I think overall, we’re doing okay in all segments, and I think we have potential in all segments, which we definitely want to fulfil.

Operator

Our next question is coming from Scott Zeller of Needham & Company.

Scott Zeller - Needham & Company

It may have been asked earlier, but I wanted to ask if there’s any color you could offer us on the behavior of the new revenue breakout for software blades and seasonality, perhaps, how that should track versus the actual product license?

Tal Payne

I assume you’re asking about software blade subscription, and since it’s recognized like any other service, which means ratably over four quarters, over the life of the contract, then typically in revenues, not in booking, in revenues, you don’t see a significant seasonality. Every quarter should increase over time, and it’s usually increased slower, just because it takes time to recognize the revenue.

So it takes four quarters. But you see, that’s the 26%. So you’re not supposed to see a huge fluctuation between the quarters. If everything is going well, you should see it increasing ratably over time. So that’s in terms of the subscription.

In terms of the bookings, it’s the same phenomenon. A huge amount comes at the Q4, and then seasonality you see as part of our deferred revenue. So you can see it very clearly. Typically, deferred revenues increase significantly in Q4, and then it goes down in Q1, it goes down in Q2, it goes down in Q3, and then it goes up in Q4. So that’s, I would say, probably linked to the same phenomenon.

Operator

Our final question today is coming from Shebly Seyrafi from FBN Securities.

Shebly Seyrafi - FBN Securities

Can you talk about the threat emulation blade. That’s a high profile sector right now. How big is that relative to your overall blade business, and how big can it become?

Gil Shwed

We just started with the threat emulation blade, but it’s actually going quite well. It’s still too small in terms of revenue impact, but in terms of the interest level, it’s quite high. We have several hundred customers already trying it out. We have some nice customers that have already purchased it and are using it in production.

So I think overall, it has a good pipeline. I’m positive about it. I think we have all the elements of a cloud service, a local appliance, or a private cloud for the customers they can utilize. I think we’re clearly extending it, and in our benchmarks that we released this quarter, I think we are very proud of our achievement. I think we have the highest catch rate to various behaviors than any other vendor in the marketplace.

So overall, I think we’re set for a good start, and I compare it to [unintelligible] blade. It has a pretty good start in that, but it still takes a couple of years to build a significant revenue stream on our side.

Shebly Seyrafi - FBN Securities

I just want to say, it looks like the blade segment is your key growth area going forward. And so I just want to see how you’re going to continue to drive growth in blade. It looks like IPS, app control, URL filtering, those were the big blade drivers swinging the needle right now. But maybe you can talk about, within, say, those three, which ones are exhibiting higher growth rates right now? And what do you see going forward?

Gil Shwed

I think the newer blades, the smaller blades, are obviously showing higher growth rates than the big blades. The big blades, the fact that we had many customers already using them, and already have them.

Tal Payne

Anti-bot, for example, is probably the one with the highest growth.

Gil Shwed

But it’s still small compared to IPS.

Tal Payne

But emulation is obviously the highest, but small number, while IPS is the biggest number in terms of dollars. So almost by definition, one of the slower ones, although it’s still a double digit growth.

Operator

And we’ve reached the end of our question and answer session. I’d like to turn the floor back over to management at this time.

Gil Shwed

Tal Payne

Gil Shwed

Kip Meintzer

Thank you, guys, for joining us today. We look forward to speaking to you throughout the quarter, and then catching up with you next quarter for the next earnings conference call. Take care, and look forward to seeing you all.

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