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Executives

Kip Meintzer – Investor Relations

Tal Payne – Chief Financial Officer

Gil Shwed – Founder, Chairman and Chief Executive Officer

Analysts

Rick Sherlund - Nomura Securities

Michael Turits – Raymond James & Associates, Inc.

Brad Zelnick – Macquarie

Brent Thill – UBS

Shaul Eyal – Oppenheimer

Gregg Moscowitz – Cowen & Co.

Daniel Ives - FBR Capital Markets

Israel Hernandez - MKM Partners

Jonathan Ruykhaver - Stephens Inc.

Sitikantha Panigrahi - Credit Suisse First Boston

Greg Dunham – Goldman Sachs

Brian Freed - Wunderlich Securities

Aaron Schwartz - Jeffries & Company

Walter Pritchard – Citigroup

Keith Weiss – Morgan Stanley

Tal Liani - Bank of America-Merrill LynchGreg Dunham – Goldman Sachs

Brian Freed - Wunderlich Securities

Aaron Schwartz - Jeffries & Company

Walter Pritchard – Citigroup

Keith Weiss – Morgan Stanley

Tal Liani - Bank of America-Merrill Lynch

Check Point Software Technologies Ltd. (CHKP) Q2 2012 Earnings Conference Call July 18, 2012 8:30 AM ET

Operator

Greetings and welcome to the Check Point Software second quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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 now begin.

Kip Meintzer

Thank you. Good morning and good afternoon to everyone. I would like to thank you all of you for joining us today to discuss Check Point’s financial results for the second quarter of 2012. Joining me on the call today are Gil Shwed, Chairman, Founder, and CEO; and Tal Payne, Chief Financial Officer.

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 July 25. If you would like to reach us after the call, please contact Investor Relations by e-mailing kip@checkpoint.com or by phone at +1 650 628 2040.

Before we begin with management’s presentation, I would like to bring the following to your attention. During the course of this call, Check Point representatives will make certain forward-looking statements. These forward-looking statements may include our expectations regarding our demand for our security products, our taxes in Israel, our share repurchase program, the introduction of new products and programs and the success of those products and programs, and our expectations regarding our business and financial outlook for the third quarter of 2012 and the full year.

Other statements which may be made in response to questions, which refer to our beliefs, plans, expectations, or intentions, are also forward-looking statements for purposes of the Safe Harbor provided by Section 27A of the Securities Exchange 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 the risks discussed in Check Point’s annual report on Form 20-F for the year ended December 31, 2011, which is on file with the Securities and Exchange Commission. 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, it’s my pleasure to turn the call over to Tal Payne, Check Point’s Chief Financial Officer, 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 am happy once again to begin the review of the second quarter of 2012.

Our revenues for the quarter increased by 9% year-over-year and in line with our guidance. Non-GAAP EPS was $0.77, representing 13% growth and was towards the high end of our projections. Before I proceed further into the numbers let me remind you that our second quarter GAAP financial results include non-cash equity-based compensation charges, amortization of acquired intangible assets, and the related tax effects. Keep in mind that non-GAAP information is presented excluding these items.

Now let’s take a look at the financial highlights for the quarter. In the second quarter, revenues reached $328.6 million, representing an increase of 9%, compared to $300.6 million in the second quarter of 2011. This growth was driven by continued strength in our software updates, maintenance, and services revenues. This revenue reached an all-time high of $205.5 million with an outstanding growth of 13% year-over-year. The growth was driven by our annuity software blades that are recognized as subscriptions. We continue to see direct success in all blades led by IPS, Application Control, and URL Filtering.

Products and license revenues were $123.2 million, representing a 3% increase over the same period last year. In October last year we introduced our new appliance line increasing our performance significantly and improving our competitive position. As with growth, since the beginning of the year we experienced an outstanding growth of over 20% in our Enterprise Gateways. At the same time, this growth is partially offset by customers opting to purchase slightly lower-end models as a result of increased performance on the one hand and current macroeconomic environments on the other hand. Many local currencies around the world weakened against the dollar adding pressure to pricing as our worldwide price list is in US dollars.

Deferred revenues as of June 30, 2012 were $536.6 million, an increase of $79.6 million or 17% over June 30, 2011. We had growth in revenues across all geographies; revenue distribution by geography for the quarter was as follows: Americas contributed 44% of revenues, Europe was 39%, and Asia-Pacific and Japan, Middle East and Africa region contributed the remaining 17%.

From a deal size and quantity perspective, this quarter we continued to see an increasing number of larger deals. We had 40 customers that each had transactions with a value greater than $1 million, compared to 37 in the same period last year. Transactions greater than $50,000 accounting for 66% of total order value, compared to 61% in the same period a year ago.

From an operating perspective, we reported great results. Our GAAP operating income was $180.5 million in the second quarter of 2012, an increase of 20%, compared to the same period in 2011. GAAP operating margin for the quarter was 55%, an increase from 50% in the same period last year. Our non-GAAP operating margin this quarter reached 59%, representing an increase of 2 points compared to the same period last year. It was achieved primarily as a result of the tale win from the strengthening of the dollar against our currencies compared to the same period last year.

GAAP net income for the second quarter of 2012 increased by 17% year-over-year from $128 million or $0.60 per diluted share, to $150 million or $0.71 per diluted share. Non-GAAP net income for the quarter was $161.8 million, or $0.77 per diluted share, up from $145.5 million or $0.68 per diluted share in the same period a year ago. Earnings per share was towards the high end of our guidance representing 13% growth year-over-year.

Cash from operations this quarter were $157.5 million. Collections continued to be strong with our DSO at 69 days, a decrease of 3 days compared to last quarter. As discussed in previous quarter, the new tax reform in Israel came into effect this year. The reform simplifies the tax structure, reduces many tax uncertainties, and lifts the tax limitation on cash distribution from future income. As a result of the reform, there is an $11 million increase in tax payments, while the effective tax rate in our P&L remains the same as expected. Both cash payments and P&L tax rates expected to reduce slightly next year.

We hedge our balance sheet against major currency fluctuations. During the quarter the dollar strengthened against most currencies in the world, resulting in a negative impact of approximately $16 million on the cash flow, with no effect on our P&L as expected. Excluding these effects, the operating cash flow improved by 13% year-over-year.

During the quarter we have repurchased approximately 1.4 million shares for a total cost of $75 million.

Finally, our cash balances reached $3,202 million. As we believe in our long term growth and the future success of our new and innovative product family, we have announced today the decision to increase our share repurchase program and assign $1 billion pool that is available for repurchases over the next two years.

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

Gil Shwed

Thank you Tal, and thank you everyone for joining us on the call today. Tal has already addressed the financial results for the quarter and I am glad to be with you on the call today and share some more information.

In the second quarter we produced decent results, beating our EPS and coming in line with our revenue projection. Let me address some of our success as well as some of our challenges.

Geographically, the US continued to show very good results. In Europe, we have been able to win large projects and deliver significantly more units overall, while the economy puts some pressure on pricing with local currency weakness against the dollar contributing as well. We have seen a different factor in different countries in Europe, some are demonstrating healthy growth like Germany, France and Italy this quarter, along with several other northern countries, while some other countries are not performing as well.

Sales of our software blades continued to post very nice growth. As you are all aware, software blades revenue recognizes an annuity and are amortized and we include many software blades bundles for the first year with our new appliances. We believe that customers with experience using them will renew them next year. Indeed, our a la carte blades revenues including the ones being renewed after the first year are showing very nice growth with about 60% year-over-year growth, which is mostly reflected in our deferred revenues in services line. The rest of our services are also growing nicely.

Our product line growth rates this year showed only a slight increase over last year. Diving into these numbers showed the more interesting story. About 80% of our products revenues these days are derived from our enterprise appliances. At the end of 2011, we launched an entirely new line of appliances that increased our performance by roughly 3x. In the past two quarters, these appliances have become a huge success and have increased our competitiveness in the market. Actually, this quarter we sold over 20% of enterprise appliances than a year ago. However, as a result of the increased performance of our new appliances in the current macroeconomic environment, customers are opting to purchase slightly lower-end models than previously.

Well, we intend to sell more units and achieve higher revenues; the current scenario has some positive undertones. First, winning more projects and increasing our share with new customers is a very important sign. Second, continuing to win new customers is another important business metrics. Finally, each such new appliance creates a great opportunity for future renewal of the software blades bundled with and future hardware refreshes. So the result is increasing our market share and increasing our future potential growth. Finally, our high-end models are continuing to show good results and has a nice pipeline. This includes the 61000 series super high-end security system, as well as our new Security Acceleration module which was just introduced, which many customers have been waiting for. It’s an exciting product that produces amazing low latency performance for data center and mission critical environment.

But the appliances are only the delivering mechanism for our security technology. In this quarter, we continue to aggressively deliver more security technology to our customers. The ThreatCloud security initiative was launched early in the quarter and experienced great adoption during first quarter of availability. We launched a new solution to combine Denial of Service attacks, the DDoS Protector, which further expanded our market opportunity.

When I talk to customers these days about Check Point’s market position, I get very good feedback. Customers are very excited about the expansion of our vision and the completeness of our architecture. In the past few years we have been able to deliver many new software blades addressing new security threats and even gaining leadership in some key markets. For example, we believe that Check Point today is the most widely used IPS and Application Control solution in the marketplace. There were approximately 100,000 gateways use IPS and close to 40,000 gateways use Application Control. When speaking to customers they mention our ability to consolidate multiple security solution and provide security management capability years ahead of the rest of the market.

Our solutions today not only deliver the most secure firewall but also gives the most accurate and detailed application control, combat the most sophisticated attacks, such as Bot, and deliver advanced technologies like DLP or Data Leak Prevention where they are all available in each gateway all while using a unified architecture. Recently, our customer surveys also shows that customers liked the range of platforms on which they can get our solutions from the very low end to the industry faster solutions, all new model with great performance.

As we look forward, we have many new products and technologies which can deliver great results moving forward. I hope with our current market share increases over increased investment and maybe with some help from the economy we will be able to translate recent advances into even stronger results. Please keep in mind that due to the uncertainties around the economy and risks in the marketplace, specifically as we go into a third quarter which was always a challenging quarter, this will be reflected in a wider range for our forecast.

We would later like to share our projection for the next quarter. For the third quarter, we expect revenues in the range of $316 to $345 million and non-GAAP earnings per share in the range of $0.74 to $0.81 per share. GAAP EPS is expected to be approximately $0.07 less. Finally, as you have probably seen today we’ve decided to increase our share repurchase program and we’ve signed $1 billion pool for this program. We believe that our market leadership and long term growth prospects make this an effective time to further utilize our cash to increase shareholder value.

We would like to thank you once again for joining us on the call today and open the call for your insightful questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from the line of Rick Sherlund of Nomura Securities. Please proceed with your question.

Rick Sherlund - Nomura Securities

Yes, thank you. First I guess on competition, Palo Alto is out in the talking all about the need for everyone else to re-architect, I wonder if you could just address that issue and to what degree have you seen greater competition in the market as a result of their entry?

Gil Shwed

First, our market has been competitive and remains competitive, so I don’t think that changes anything significant in the marketplace. Specifically, I don’t really get that need to re-architect, I think Check Point says for the last two or three years an amazing new architecture for a security solution, the software blades. I think with customers, they find it the best architecture, it is a multi-layered approach, it is a very modular approach so each customer can run and take and get the performance for exactly what they want. It is very flexible in terms of the hardware architecture and the hardware modules it can run on. So I think overall Check Point today has the best architecture, the best management capabilities, and I think we are hearing a lot of good feedback on that from customers on one hand and from many testing labs and other environments as we see.

Rick Sherlund - Nomura Securities

And on the competition side, are you starting to – I mean is the competition getting tougher or in some bars I talked to say, well it was tough a year ago, but you have responded and the channel, you are doing more channel promotions and things now and you’re responding better. Is the competition getting worse or you seeing it less than a little bit?

Gil Shwed

I think it has remained similar. I mean, every year we have new competitors, every couple of years where some competitors are generating a lot of headlines. I think we’re never resting on our loyal today, but our main focus is on what we can do to advance security and to do for the customers to advanced technology for the customers and that’s what we’ve been doing for a very long time. And in that long time I think we went through and I think you’ve seen that for like four different generation of competitors that came by had couple of good years and kind of disappears, but they went down, or got acquired, or went down with the company that got acquired with. So, I think we’ll continue to work hard. We’ll continue to generate to deliver more solutions, more technologies and so on. I think that is our answer to that. So, I am not inclined with the answer that you are hearing about our advancing technology compared to Palo Alto and others.

Rick Sherlund - Nomura Securities

Thank you.

Operator

Our next question is from the line of Michael Turits of Raymond James. Please proceed with your question.

Michael Turits – Raymond James & Associates, Inc.

Hi guys. On the buyback you announced that the increase in authorization of $1 billion. Should the change in the tax structure, any reason to expect that you might be more aggressive on the (inaudible) and also just rough expectations to the actual tax rate going forward?

Tal Payne

The effect on the tax law from the beginning of the year, obviously helps the fact that we can distribute much significantly higher amounts if we chose so. Our board has taken into account a growth opportunity of Check Point in the long run and our strong product, it’s success in the market, think it’s an appropriate time to do so. We approved the $1 billion of up to two years, we can be flexible and certainly it is not going to be necessarily in a straight line matter. We can do based on market condition and our expectation be flexible in the acquisition. If we would like in the future to change it, we are always free to do so.

Michael Turits – Raymond James & Associates, Inc.

And then, was there any impacts from the deployment of the GAiA operating system, that’s actually out and being distributed, but a 64-bit should be helpful to performance and any impact in terms of acceptance and purchases of appliances?

Gil Shwed

So, we’ve got pretty good feedback on the initial acceptance on GAiA. We’ve seen them in the recent release that has GAiA 85 75.40 has significantly more interest than previous version. For example, the customers who have installed this version or downloaded that version, it is 60% to 70% higher than previous version for the same period of time. So, the interest level is high. The 64-bit is also very good advancement, keep in mind by the way 64-bit doesn’t necessarily increase performance. It does increase capacity, so it allows systems to get many more connections and bigger capacity or performance on some area because higher performance in some areas it maybe the lower performance, but overall the reaction is very very positive and we get a lot of interest and I think in few months we’ll see how successful it is when the large customers are going to really start to deploy it in large installation.

Michael Turits – Raymond James & Associates, Inc.

Okay, great guys. Thanks.

Operator

Our next question is from the line of Brad Zelnick of Macquarie. Please proceed with your question.

Brad Zelnick – Macquarie

Thank you very much. I just wanted to talk about the guidance a little bit. The revenue guidance that you gave us seems to be a bit lighter than your typical seasonality. I was wondering how much of that is for movements in FX and resulting pricing pressure versus conservatism around the environment? And also on the full-year guide, does your full-year guidance for 8% to 12% topline growth and $3.10 to $3.20 in non-GAAP EPS still hold?

Gil Shwed

I think for this quarter again the level of uncertainty around the economy is high and especially when we look at third quarter which tends to be slower in the activities, especially if we look at the weakness it concentrates around the Europe, when everybody is going on vacation now and everybody by the way also focusing on the full year budget and the full year project. So, Q3 has always, say it every year higher level of uncertainties given the economic environment that just threatens it. I think this results a lot of good things can happen in both in Q3 and Q4 and there is a lot of large projects that we work can, but in order to accommodate sort of both upside and the risks involved I decided to expand the range rather than to change the necessarily the specific targets that we have. For the year again, we are not right now re-opening our targets I think we’ll see at the end of Q3, again we may have very good news and we may see a market that is not so good and I think that both options are open. If I said there is a lot of good things happening on our market and the results of local challenges arising from that.

Finally, I mean, you have asked about the impact of the currency and so on. There is multiple impacts of the currency. One positive is that our expenses are down due to the strength of the dollar, so all the expenses that we have outside the US are showing low in terms of dollars. The big impact is the biggies, the facts with our customers, in many markets Europe is one of them, but also in Asia their buying power is now is lower because of the dollar. Our products are priced in dollars and not only that their buying power is lower, but the reason with the dollar is threatening or their currencies are weakening is because their economies are not very strong which means that in many cases these customers are not increasing their budget, they may be even cutting their budgets. So it takes a double effects of a local currency that let’s say weakens, take the Euro almost by 15% in the last year and plus budgets that are in local currencies that are going down or staying stable that has big effects on their buying power and that shows now.

The good news for us is that we have today amazing performance in our new appliances and we have seen revenue of last quarter that customers actually purchased more units, got higher performance, but unfortunately for us at least repurchased slightly lower end models than they used to purchase before. For the future it has a lot of good things. In a year from now when they renew their subscriptions in various software blades, we’ll have more units that will renew, when they continue to need more performance they will refresh even more appliances, so there are a lot of good times for the future, but right now clearly we see that in big parts of the world their purchasing power has been a decrease, that has an effect now. Again it’s speculation to say that if these currencies were stronger would we’ve seen 3% more revenues or 20% more revenues which would be a speculation, but clearly the economic data is showing a lot effect.

Brad Zelnick – Macquarie

Thanks Gil and just so I am clear and everybody is clear. Did you say that your full year guidance at this point still stands and you still believe that you can achieve those targets that you had initially set up?

Gil Shwed

I think we that we have a good range and I think we still believe in better range, yes.

Brad Zelnick – Macquarie

Thank you very much.

Operator

Thank you. Our next question is from Brent Thill of UBS. Please state your question.

Brent Thill – UBS

Thanks. Gil, just on the product side. I think last quarter you mentioned you expected a reacceleration, we saw a deceleration and it is obviously explainable with what is going on with the macro. Can you just maybe help us walkthrough how you are thinking about the back half of the year specifically on the product side, recognizing that you are seeing the shift in the annuity blades and that’s going to continue with deferred revenue?

Gil Shwed

I think if I look at the second half of the year we have a very nice pipeline. We have many good projects and we have a lot of good prospects and on the flipside we have the economy and so on. So, for the third quarter I’d be a little bit more conservative and personally I tend to be rather optimistic on the fourth quarter given what I know and given the marketplace. As I said, there are some good signs, for example, you look at the 20% or it is more than 20%, I said 20%, but it is actually much more than 20% increase in the number of gateway units that we sold this quarter that shows that customers want more security and that shows that we have the competitive value. And that is not by the way a price pressure because we didn’t give significantly more discount or a more discount in general. The customers are just – before purchase the $40,000 appliance for example, and today they want another one. Today, they can get the same performance from us for let’s say a little bit more than $10,000, if they want 50% more performance they can get it at $20,000, and if they paid $40,000 they will get three times more performance. And what we’ve seen is what customers have done with that. If they purchased a $25,000 model and actually purchased almost two of them for the same price in many cases. Customers have actually used that product competitiveness that we have to purchase even more units and I think for the future it is a good sign.

Brent Thill – UBS

Thank you.

Operator

Our next question is coming from the line of Shaul Eyal of Oppenheimer. Please proceed with your question.

Shaul Eyal – Oppenheimer

Thank you. Good afternoon, guys. Tal, a quick question for you, you mentioned before the Application Control, the URL Filtering, and the IPS as the leading blades, is that basically kind of the way that kind of you ranking internally over those blades internally at Check Point?

Tal Payne

You mean ranking by sales. Basically if I look at the dollar value which of the blades, these are the top three. When we look at the growth rate, they all have very healthy growth rate. We actually have seen a very nice growth rate in the URL Filtering and Anti-Spam. Anti-Bot started very nicely and it’s just been launched, so it is quite interesting, but in terms of dollar value IPS, Application Control, and URL are the top ones.

Shaul Eyal – Oppenheimer

Got it. Thank you for this clarification. Gil, you mentioned a little bit about Europe, Germany, France, Italy foreign exchange kind of doing a little better. What about the situation in the UK and that could be helpful, if you can address that?

Gil Shwed

I actually better not get into too many countries example. Actually what we’ve seen in Europe and maybe I quoted these countries to show that every quarter we see different pattern in different countries. One quarter, the UK will be strong and in another quarter France will be strong and so actually France is being weak for us for several quarters and now it is becoming stronger. Italy has been weak for us for a long time, now it is actually I think it maybe the second quarter in a row becoming very strong. So, there are many different examples. I think treating Europe as one is always challenging because there are many countries and many economies within Europe and the interesting thing is at least at the moment they vary between quarter to another. There is no one country that I can say which is like a second year in a row in a good situation or even in a bad situation because it really varies from quarter to quarter.

Shaul Eyal – Oppenheimer

Got it. If I may kind of squeeze this final question. With respect to product revenue in the third quarter how should we be thinking about it flat, a little off sequentially?

Tal Payne

I think if you look at the issue you will see it’s sometimes it is up and sometimes it is down it really depends taking into effects also the range that we provided, I think both can happen.

Shaul Eyal – Oppenheimer

Thank you very much.

Operator

Thank you. Our next question is coming from the line of Gregg Moscowitz of Cowen & Co. Please proceed with your question.

Gregg Moscowitz – Cowen & Co.

Okay, thanks very much. Gil and Tal you both mentioned I think earlier that customers are opting to purchase slightly lower-end models as a result of the increased performance and also the macro environment, but I am wondering if you maybe help me reconcile the fact that Gateway Appliances unit to grow by 20% year-over-year whereas product revenues grew by 3% and bookings grew by 9% and Gil you mentioned that example recently I think in response to Brent’s question about how a customer can buy a $20,000 appliance with 50% more performance than the old $40,000 appliance and I am just kind of wondering, is this is just a slight product mix shift and going forward is this going to be something probably would benefit the customers actually receive that well can strain your growth in that respect?

Gil Shwed

I think again if the reflection of the better performance that we have any slight reflection of the economy, but well we give you a simple example. In the past, the customer purchased a power 150/70 which costs $42,000 and has overall performance of 9 GB per second.

Today, we can purchase something that is almost 3 times as fast for 45, the 12400 model, for 25 GB for $45,000 that delivers 25 GB that is almost 3 times as fast and in a good economy that will do. We’ll spend 10% more and get 3 times more performance. If you are little bit more conservative, we can get 60% more performance with the 12200 model that we have launched. These are all the new models it costs only $29,000 and delivers 15 GB. We can buy the 4800 for $21,000 and get 20% more performance that we got before at $11,000 and they can even go as low as to the 4600 and get the same 9 GB that they got before, its quarter of the price. So, what we’ve seen is that customers have sort of taken if we look at the change in product mix or what model we purchased is with most customers in that case or the average behavior was to take the 60% more performance at 20% less price which is not an unreasonable behavior for customers especially given the economy now again that would be maybe an average. In reality, we are seeing sales of all the products. There are nice sales of the high end product. Actually, the super high end product is $61,000 there wasn’t a comparable a year ago, but it is actually doing quite well and it has a big pipeline and we are winning more and more deals, actually in sectors that we didn’t even think we will win commercial sector and so all noticing the telecom sector and this is generally the behavior of our entire product line and I think you can understand why now.

The good news is that they buy more units because if they would just buy more performance at a lower price they wouldn’t buy more units and we would see a different behavior. So, the good news is that we were able to grow revenue on the appliances. And on very specific appliances, even grow revenues nicely and that is the good sign that shows the competitiveness in the market share again.

Gregg Moscowitz – Cowen & Co.

Ok, thanks Gil.

Operator

Thank you. Our next question is from Daniel Ives of FBR Capital Markets. Please proceed with your question.

Daniel Ives - FBR Capital Markets

Yeah thanks. Could you go through the quarter and even month by month in terms of changes you saw in the customer base or deal flow? Just, so we can understand how the quarter, the trajectory was and mainly what we’ve seen over the last few weeks.

Gil Shwed

I think the quarter remained pretty back and loaded like we’ve seen in the previous quarter. Our staying or becoming even more back and loaded to some extent which is by the way partial reflection of the fact that we are winning larger and larger deals and I think shall gauge some statistics about winning more large deals and unfortunately in our industry people close large deals at the tail end of the quarter so we are seeing the quarter back and loaded. In terms of how the quarter behaves, I think our sales force had some forecast within the quarter and I think they came within a reasonable range. So, that forecast didn’t change throughout significantly during the quarter. There were changes, we weren’t exactly where we are, but that is very very normal in every quarter. So, it is not that we started low and got revived or that we started in the high forecast and finished with a low one. Actually, the sales force kept its forecast throughout the quarter and achieved pretty reasonable results for that.

Daniel Ives - FBR Capital Markets

Okay, could you talk about in terms of discounting near and toward the end of the quarter, was there anything unusual this quarter versus what you’ve seen historically.

Gil Shwed

Not really. Actually, discount rates remained pretty much within the same line. In Europe, there may have been a slight like one or two or three points more discount, nothing major, but the only exception would be maybe Europe because they were given 2 free points more discounts on the average. At the end of the quarter, we don’t necessarily give larger discounts and so on. It is not that customers should wait for the last day. Actually, customers that wait for the last date to get the discount is less likely to get it because there is so much flow that these at least couple of days and we have a good process of approving it and reviewing it and so on. So, tomorrow for the build up of the deals and deals again when the sales force works with them the target everything to close before the end of the quarter and that’s what they do.

Daniel Ives - FBR Capital Markets

Okay. And just one final one. In terms of the cash situation, obviously you have enough cash to buy a small country. You got the buyback, you have some in MNA jus speak to your thoughts, obviously you represent the board in terms of issuing a dividend, thanks.

Gil Shwed

I think we’re reviewing all the options every quarter and you see it and you are seeing with time we’ve decided to increase the buyback. I think the first buyback share is in the biggest – let’s say three elements to the buyback. One is the prospects growth that we see moving forward. The second is the use of the cash if we have better alternatives for cash usage and third is the shareholder interest or the shareholder feedback that we get and I think all three elements point to the fact that the share buyback is the right decision. I think it is a very good use of the cash given the interest rates today and given that we have enough money to fund deals and acquisition if we want to and I think we believe in the prospect growth. So, now it makes it a good time to do that and I think we are conducting once in a while some informal surveys amongst shareholders and checking what the shareholder preferences what you guys are thinking and not general speaking every time we did that, we saw was huge preference to a stock buyback dividend, over than doing nothing with it. Clearly I think share buyback I think one like 70 or 80% of the growth. So, that is what the board is considering and that is the board’s decision.

Personally, I am not against dividends, so there is no bias in the year and we will continue to consider the right option as we move forward.

Daniel Ives - FBR Capital Markets

Thanks.

Operator

Thank you. Our next question is from the line of Israel Hernandez of MKM Partners. Please proceed with your question.

Israel Hernandez - MKM Partners

Hi, good afternoon guys. Just a question on the performance of the Americas, but in my calculation it looks like it was a bit lighter than my expectations. You just talk about what you saw in the Americas particularly in the US for anything that impacted growth in the quarter, anything you can add that will be great, particularly around wider deals, thanks.

Gil Shwed

US actually I can summarize it one word, it was actually great. The US continuing like double digit growth for I think it is now almost the third year maybe even slightly more. The market is performing well, I think almost all the regions in the US did well this quarter. So, the US itself is actually showing very good economical strength for few years now.

Israel Hernandez - MKM Partners

Well, thank you.

Operator

Our next question is from Jonathan Ruykhaver of Stephens Inc. Please state your question.

Jonathan Ruykhaver - Stephens Inc.

Yes, hello. I’m wondering if you can give us a sense of the size of the IP series install base I am just trying to get a feel for the monetization opportunities, result of the potential for hardware conversion and there is a followup question is, how meaningful has that conversion activity been today, it doesn’t seem like you’ve too much yet.

Tal Payne

The install base is tens of thousands, it is quite a large install base that is historically either some of them moved from the IP series to the new product and some of them continues to refresh over the years from a lower IP to a higher IP series. So, it is not necessarily means that they didn’t refresh for 5 years. When they needed to refresh some of them moved higher in the IP series and some of them moved to another product line. Right now the active IP is tens of thousands of unit.

Gil Shwed

(inaudible) tens of thousands, but I would just say that we are starting to see the shift in the last two or three quarters for a long time we have seen a pretty stable sales of IP series appliances. In the last 6 months we’ve seen a nice shift toward the other models that we have, and that we have and I think the big catalyst would be the GAiA, a new operating system that would allow similar transfer of the environment that people developed over the year with the IP series and I think GAiA started last quarter keeping in mind the customers to move or the customers with the IP series tends to be slowest customers to move or the customers with the most complex environment and more conservative customers and for these customers, they take a lot of time to do their updates and the trials and so on. So, I don’t expect a big change overnight, but the good news is that the change has started. And I think that is finally happening and with the GAiA and the new appliances that we have I think it is a great opportunity for customers and I think customers realize it now.

Jonathan Ruykhaver - Stephens Inc.

Okay, good and then just one quick final question that the service provider vertical for Check Point. Can you just talk about how big it is for the company? What kind of activity is experienced with the 61,000 system?

Gil Shwed

I don’t have specific data for the quarter, but I think with the service provider and the carrier market is probably the second largest sector that we have and I think it is continued to perform okay. There is big few wins with 61,000, even though so far most of the 61,000 (inaudible) enterprises in different areas. So, we are still big pipeline in the big opportunity in the telecom service provider market for that.

Jonathan Ruykhaver - Stephens Inc.

Okay, good. Thank you very much.

Operator

Thank you. Our next question is from Jonathan Ho of William Blair. Please state your question.

Jonathan Ho – William Blair.

Good morning guys. Just wanted to understand, with regards to some of the large deals that you are seeing out there. Are you seeing any change in terms of the behavior relative to closure rates or just in terms of pushback from customers that need more approvals to get these deals through?

Tal Payne

I think factually we’ve seen more transactions which are large as you can see but the statistic we have 66% over $50,000 and for 40 customers that purchased more than $1 million a quarter, having said that naturally when the economy specifically in Europe is lower or the same by June then this requires more approvals, but we didn’t see anything that I can point into clearly.

Gil Shwed

And if at all we’ve seen more large deals, pushed back completely or anything like that.

Jonathan Ho – William Blair.

Got it and just in terms of sort of trade down activity that is taking place, would you expect that to accelerate where people maybe in a tough environment straight down even further or you think it has sort of stabilized at the current levels?

Tal Payne

Repeat the question please.

Jonathan Ho – William Blair.

When it comes to trade down activity, so, when people are selecting maybe the lower cost appliances. Do you think that trend has reached a stabilization point or do you think customers are going to continue accelerating that where they achieved a cheaper appliance, but one that can deliver strong performance.

Tal Payne

Actually, this quarter we started to see a small move actually from the mid to the slightly higher levels so the transaction is starting to go through the right direction, but it is too early just been one quarter. I think next year it should be easier just because we have already better comparables as well and as time goes by and there is no need for throughput and the economy is better, everything should take it to the right direction.

Gil Shwed

And maybe to reiterate what Tal just said that at first we did some steps to rebalance some of our pricing and in June we did introduce another model of appliance and then sort of the mid-to-low end and then we shifted some of the prices to better reflect the price performance of the product and that would be received well by the customers and this actually will help drive more into the right side of the product and I think over time customers needn’t want the more performance. The customers are running more softer blades on the appliances. Customers are getting more bandwidth and the internet customers are getting much faster data center with enterprise and so on. So, I think overtime we have a big believe that customers will want and will lead their higher performance that we can deliver. And I think that’s between go to write a little bit in the future.

Jonathan Ho – William Blair.

Got it. Just one last one in terms of the competitive environment. I think people have talked a lot about the fast growers, just in terms of Cisco and Juniper and maybe some of the more traditional competitors, are you seeing any stabilization there, or is sort of the same?

Gil Shwed

I think a little bit. I think right now there is still some loss of share on their part, as far as I can see. Obviously, there is always an expectation that if somebody is not doing extremely well they will come up with a newer model then they will come up with dramatic news to the marketplace. It doesn’t seem that is really happening yet on the marketplace. So, in general the market is the same. I mean, it’s been competitive; it is competitive, not too much beyond that.

Analyst

Thank you.

Operator

Our next question is from the line of Philip Winslow of Credit Suisse. Please state your question.

Sitikantha Panigrahi - Credit Suisse First Boston

Hi guys, this is Siti Panigrahi for Phil. I was hoping that you could provide some color on what you are seeing in terms of business strength between large enterprises and SMBs?

Gil Shwed

Most of our sales are for mid and large enterprises. We do have a lot of initiatives to address the SMBs. And actually, it doesn’t seem any specific results for the last quarter, but in recent quarters we did have some nice gains on SMB product. Even this quarter, I think our lowest end model, the 2200 series has done quite well. I think if you still look at some potential ahead for us, so I think last year started a big initiative at very high end, later on when we sort to refresh the entire enterprise grade appliances and clearly sometimes in the future we will have more and better news also for the very low end of the marketplace with some markets that’s on the sales and marketing front. I think we are slightly improving and in the product side there is still more that we can do and we will do eventually.

Sitikantha Panigrahi - Credit Suisse First Boston

Thank you.

Operator

Our next question is from Greg Dunham of Goldman Sachs. Please proceed with your question.

Greg Dunham – Goldman Sachs

Thanks. Just following up on Greg’s pricing question. Is there any way to quantify the FX impact versus the mix shift? And really the question is, if unit growth was greater than 20% today, what has it been historically and what kind of is the sustainable growth rate as you look forward?

Gil Shwed

Historically it’s been much lower. It’s been in the single digit. The unit growth, so it’s a very big shift when we are talking about more than 20% and again it’s more than 20%. And now what can be the FX effect? The euro for example in the last six months or so has declined approximately 15%. I don’t know, but the biggest one, the Indian currency has declined by in the last six to nine months by 25% and even more percent. Now trying to quantify what could we have sold more if that wouldn’t happen, it’s between 0 to over 15% which would be a complete speculation. So, the prices remain constant and so on I think the buying power would have been about 15% higher for the year-over-year market.

Tal Payne

I just want to add. The reason we try to quantify, I mean, all of us can calculate what the dollar did against the euro, but what we don’t know is if it didn’t have that effect then the effective budgets of customers for example, in Europe, would have been 15% higher, which product would they buy, would they buy the higher one, or would they go for the same budget or will they go to the lower ones.

Gil Shwed

Will they buy even more products? Or by the way, let’s remember this. When the economy is growing it usually means that the buying power is even bigger because when the economy is doing well, customers are increasing budget, when the economy is not doing well, customers are shrinking budgets. So, the effect could have been even much higher had the economy been better. Before I just look for one number, for Europe, again, I am saying a year to year comparison, it could have been – 15% would be a good speculation for the middle but remember the middle could have been much lower, it could have been much more.

Operator

Our next question is from Brian Freed of Wunderlich Securities. Please proceed with your question.

Brian Freed - Wunderlich Securities

Thanks for taking my question. Real quick, as you think about the long term opportunity for your annuity blades, can you talk about the pricing of your annuity blade on different hardware platforms, specifically, is there a lower price for an annuity blade as people transition to a lower priced appliance, or does the addressable market for annuity blades over the long term remain the same?

Gil Shwed

In this example that we have the annuity blades’ potential is going higher because of the increase in the number of units. Now, the weights price – there are service elements, service and subscription elements that’s a percentage of the appliance and there is the annuity blade price which is like three or four groups of appliances, it can be something like say $2,000 for a small appliances per year, $5,000 for the enterprise appliances, and $7,000 or $8,000 for the higher end appliances per such a blade, that would be roughly the order of magnitude the pricing, it grows in groups, so it’s not per appliance or per specific model, it’s between such as those three or four groups between them. Overall, with the increase in the number of units which we are seeing, we are seeing that the potential is for higher future potential renewal, but that’s again we see in the year what it comes to.

Brian Freed - Wunderlich Securities

So in the specific example you gave where customer might opt for a 12200 versus 12400, is the opportunity for the annuity blades essentially the same regardless?

Gil Shwed

The 12400 and 12200 I think the price for the annuity blades is the same. Yes, that’s an exact example.

Brian Freed - Wunderlich Securities

Okay. Alright, thank you.

Operator

Our next question is from Aaron Schwartz of Jeffries & Company. Please proceed with your question.

Aaron Schwartz - Jeffries & Company

Good afternoon. I just had a question on the average duration of the annuity blades. Are you seeing any sort of shift there after two or three years? Has there been any sort of change in discounting of pricing from multi-year versus single year?

Gil Shwed

(inaudible) are buying three years, but still most of them buy one year. And remember that in many cases we give the first year bundled with the product. So the big shift we will see a year after. I mean, we are seeing it now, we are seeing it now for the IPS, we are starting to see for the Application Control, and I think for the other blades that we have like the URL Filtering, the Anti-Bot, and so on we will see the big shift a year down from now when the customers become more familiar with them, that’s one element or as customers have used the one sort of free or one bundled year when they come to renewal. The good news is that we have seen very, very good renewal rate on the sort of bundled or free one much better than we thought. Usually, in the industry what’s common is that if you do something like you get the renewal on something that’s essentially free, it’s not really free but it’s included in the price. I think in the industry if you get 10% of people renewing it, that’s supposed to be good. We are seeing things that are in much much higher than that -- three, four, even five times bigger than that in most customers are buying, which is a great sign not just from the revenue perspective but also from the fact that customers are actually need that and use that and that’s the main good sign for the future.

Tal Payne

I think, just to remind you before we said, Gil referring is about 40% which is very nice, also as you remember in the non-bundled we talked about higher rates which are around 60% and actually after a few quarters now it looks like we have succeed to increase it slightly. I think there was more potential, but it’s now getting closer to the 70%, so it’s actually nice improvement in the renewal rates.

Aaron Schwartz - Jeffries & Company

Okay. That’s helpful. I had a quick follow-up, I know one quarter is not a trend but sort of the mix shift to the lower end and I know you have more unit growth there, but is there any limitation on the number of annuity blades that would be sort of running on a lower end box or certain bundles that have fewer annuity blades on the lower end versus the higher end?

Gil Shwed

Currently all our appliances can run – all the enterprise appliances, the lower one is called the 2200 and the highest one is 21400, they all run pretty much all the blades and they can carry that load without a problem. They do differ in performance. So, obviously, if you want to ride on older blade and to do it in a high capacity network you need the stronger appliance. But for a small company, with small number of users you can run all the blades or something that’s not very high.

Aaron Schwartz - Jeffries & Company

I understand. That’s for taking the questions.

Operator

Our next question is from Walter Pritchard of Citigroup. Please proceed with your question.

Walter Pritchard – Citigroup

Great, thanks. Just wondering on the guidance as a follow-up, I mean, it seems like if I take the low end of the guidance of $315 million I assume that software updates were update slightly on a sequential basis just as those roll off the balance sheet. That would put product revenue about $106 million, which would be where it was two years ago. I am just trying to get a sense of – that sounds far worse than a worst case scenario we have heard from other companies and from the market overall. I just wanted to get a sense of what type of either macro conditions or business specific conditions would be affecting the company to take product revenue that low?

Gil Shwed

The short answer is that we don’t expect the worst -- we don’t expect the worst case to happen. The longer answer is that you have to keep in mind that more and more revenues are shifting to our subscription line, the software blade, but the very simple answer that I really like to hope that the worst case is not going to happen and I am not shooting for the worst case. I think that you can see we haven’t gone to worst case for many, many years. So, that’s the short answer.

Walter Pritchard – Citigroup

Great. And then Tal, just on the buyback, it wasn’t clear as to whether or not the higher buyback level, if you could put that in place during Q3 or is that something you have to wait until 2013 starts?

Tal Payne

No, it can start now.

Walter Pritchard – Citigroup

Okay, great. Thanks for taking the questions.

Operator

Thank you. Our next question is from Keith Weiss of Morgan Stanley. Please proceed with your question.

Keith Weiss – Morgan Stanley

Thank you guys for taking a question. I think one of the disconnects that we are trying to figure out here is that growth seems to sustain pretty well in your 2Q, if you look at billings growth, 9% in Q1, 9% in Q2. Based on the geographic mix that you gave us, at 39% of revenues, it looks like Europe held in pretty well from Q1 to Q2 as well. But then the guidance range that you guys gave for 3Q really expanded out much more beyond what you normally do, which is a $10 million range to levels that you guys gave back in sort of a kind of range you gave back in Q1, Q2 of 2009 when obviously conditions were pretty dire. So, I guess, we are struggling with a little bit, is there something you saw that’s not in the income statement, not in the balance sheet, in terms of billings in your pipeline or what not that caused that extension or that widening of the range over that increased caution?

Tal Payne

So, actually. The percentage of growth in the P&L, in the revenues and in the bookings are different. You see 9% in both of them, but the Europe in the P&L – remember the timing issue sometimes of service recognition and booking recognition and the products recognition. So, what we related to is what was actually in the booking of Q2.

Keith Weiss – Morgan Stanley

Okay. So, is that saying that billings growth in Europe fell off significantly in Q2?

Gil Shwed

What it means is – in the Q2 bookings in the Americas were much better than the overall booking growth. And booking in Europe was probably a little bit lower.

Kip Meintzer

We have time for one quick question, operator.

Operator

Thank you. Next question is from Tal Liani of Bank of America-Merrill Lynch. Please proceed with your question.

Tal Liani - Bank of America-Merrill Lynch

Thanks guys. Service revenues, there was a deceleration this quarter and your guidance implies another deceleration to about 10% year-over-year growth next quarter. Should we expect it to – if the weakness continues on the product side, should we expect it to eventually decelerate to growth rates which is kind of single digit, in the neighbourhood of maybe the billing growth or the product growth, or is there anything else that we need to consider that could still suggest higher growth rates for the services? Thanks.

Gil Shwed

I think what you are seeing is what we have seen. As I said, I think there is a lot of potential going out for in the future and there is also a lot of risks going forward, I think it’s reflected in the range that we gave, and is reflected on many other things. I am always saying that predicting a future is always difficult. I think I may have been completely open with you on the call right now. We have a very nice pipeline, we have some very large deals that we can win this quarter or for the reminder of the year. There is a lot of interest in the product. We just held – for example, a Check Point experience conference in Europe this quarter, and in the US actually, two, and the European one was an amazing conference, huge attendance, high level of interest, yet from the same time if you look at the purchase level they are not there. So, if what we are seeing in the marketplace in terms of the level of interest, in terms of the security solutions that we have, in terms of the refresh cycle is going to bear fruit, or going to see very very good results in the future, it can be Q3, more likely to be Q4 and hopefully even more in 2013. The economy dominates, then lower guidance that we give is going to dominate. I tend to be optimistic and I like to hope for the good, but I also have to be very realistic and share the risks with everyone on the call.

Kip Meintzer

Alright. Thank you very much, everybody. We appreciate all your attendance and we look forward to speaking to you in the near future. 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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