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Check Point Software Technologies Ltd (NASDAQ:CHKP)

Citi Technology Conference Call

September 05, 2012, 09:00 am ET

Executives

Tal Payne - CFO

Kip Meintzer - Global IR

Analysts

Walter Pritchard - Citigroup

Walter Pritchard - Citigroup

We are ready to start. We've got the 9:00 am session here, second day of the Citi Global Tech Conference. I am Walter Pritchard, software analyst; happy to have with us this morning to kick it off Check Point Software. The company, I think in my universe, the longest if any; it’s about 12 years. We’ve got Kip Meintzer, who is the Global Head of Investor Relations and we’ve got Tal Payne, who is the CFO. I think Kip is going to kick it off with some Safe Harbor and then we will go into some Q&A and I'll leave then room for questions.

Kip Meintzer

Alright. So, we'll start off by highlighting forward-looking statements. Regarding any forward-looking statements in the course of the presentation, obviously are subject to risk and uncertainties that company takes no duty to update any of the forward-looking statements maybe made are covered by the Securities of Exchange Act of 1934.

And with that, I'll talk it back to Walter and there we go.

Walter Pritchard - Citigroup

Alright, thanks. So I guess we're sort of asking every company here, we’ve all come back in September you know what have you seen in the world anything you would like to update folks on what's happening globally and people I think are pretty mindful of especially the conditions in Europe; your perspective on that?

Tal Payne

In reality, I think people enjoying their vacations. That’s all we know about this quarter for now, because Europe just came back from vacations. And for our business, still back end loaded as you know that we really see (inaudible) products and services, obviously we have a lot of it coming from the previous deferred revenue. But really booking doesn't start until the last month which is September which just started. So if you ask me but the end of the quarter, I'll be encouraged to tell you. I don't see any implications for anything else therefore the people still could afford vacations.

Walter Pritchard - Citigroup

Just from a business perspective if I look at your growth rate in the first half of 2012 and I compare that to what it was in 2011 and maybe I don't worry about revenue recognition and what's deferred and was recognized I am sure something like billing as the proxy for growth and the growth is rate slowed by you know five, six points something in that range. What do you attribute that difference in growth rate to and how should we think about more of the longer term rate of Check Point is it more like what we saw in 2011 and more like what we're seeing in 2012?

Tal Payne

Sure. Firstly, we believe we’ll grow faster than the market and we still believe that we’ll grow faster than the market. What's happening to us this year, this will be analyzed according to what's happened specifically in the product line that we launched. So historically when we launched the Software Blade architecture, we saw is what you referred to we had a shift from product revenue into service revenue, so in the billing you saw quite accelerated growth rate because it slowed down the growth of the product, you can see very clearly last year while it increased the deferred revenue growth a shift as a result of the software blade, the annuity software blade.

By the time we sold the product, part of the product revenue is deferred as a result of its relation to the software blade, annuity blade plus the deferred revenues are recognizing into the service, so that’s part of the phenomena of 2010, 2011.

At the end of 2011 which is last year, we launched a new product line which is end to end from the lower terms to the high end for the appliances where the philosophy was we are going to keep the same price level, tripling the throughput. The reason was that we wanted to increase the throughput in a way that allows the customer to get higher throughput and in the future adopt all the different annuity blades.

The reason is one of the biggest growth engines for Check Point for the future is the annuity blade; all the additional services that we sell on the clients, Antibot, the URL filtering, the DLP, all the services that are part of the client and then when we launch the new product that’s how we price it; when we came into the year which is when we started the sale, we noticed one thing, first we have a significant increasing the number of units that we sold already from the beginning of Q1 we saw more than 20% increasing the number of units that is very unexpected, (inaudible) is all in the mature business…

Walter Pritchard - Citigroup

Especially higher unit growth within the product line?

Tal Payne

Significantly higher in the number of units that we sell and that’s why we provided that data because it was even beyond our expectation. So the number of units increased significantly which means that the products are very competitive out there in the market that’s one indication that was out.

Second indication is that the acceptance was so fast that the move from the old product line to the new product line that we launched was so fast already in Q1 we were around 80% of the new client sales came from the new appliances continued also in Q2 to increase so over 80% of the clients in the new appliance so great acceptance.

Another phenomena is that the total group would be so much higher in the new product line we see some shift from I will call it one level down, so everybody could buy one level down and still experience an increase in the throughput. So this is related to the economy and maybe it is related to the fact that while the throughput is enough for them and it’s only three times of throughput and then it is moving down so we saw an increase in the number of units, a reduction in average ASP into account which brought us to 5% growth in the product.

Now looking into the future, first to grow the significant increase in the installed base which is that the customers that we sell the future annuity blades; that’s a good phenomenon. Second even in the mix shift stays that way when we come to the next deal it is annualized, so you will have assuming the same mix, are put to report, so when we enjoy growth in the unit we receive growth in the product again, so it should be accelerating in the future.

And on top of it overtime customers throughput may increase, as it happens every year and then they start to crawl in the ASP or in the product family and therefore increases the ASP, we finished 2008, 2009, 2010 and 2011 and it continue to increase. Now we launch a new product line it went down and hopefully we will start seeing and doing that; so that’s what created the pressure on the product growth in Q1 and in Q2.

Walter Pritchard - Citigroup

So sort of net of that is in the first quarter of 2013 and the first quarter of….?

Tal Payne

It should be at that level.

Walter Pritchard - Citigroup

Okay got it. As it relates to, as you referred, you mentioned blade, I think this has been a growth driver that you’ve been talking about for probably three years, four years which started to impact the numbers in the last one year to two years. Can you talk about sort of what percentage of your installed base, I know you quantified blade revenues sort of as overall but how penetrated is blades into the installed base? How many customers have at least one blade in the sort of using that as a part of the security architecture as opposed to just kind of getting it as a bundle which is the strategy you started shortly?

Tal Payne

So, it's still early days. You remember only two and half years ago, or now its three years already but immediate 2009, but remember when we launched, maybe I’ll first explain the difference between different blades because it's important. Firewall is also called the blade but it’s not relevant. So every product obviously a firewall and VPN, which is the basic product in majority of our revenues. Since 2009, we started to launch new services which we called a blade. Think about it as a software module and every time we launched it, the majority of them being launched in the service. So it's like a subscription. So we started with launching of the IPS, Intrusion Prevention Service, then we introduced Data Leakage Prevention and we introduced Anti-Bot.

We introduced application control. So on average, every year we introduce about one blade. So there we have about seven. We started with three and then each year we launched one. So we reached to seven right now. The wafer adopted first that the customer needs software blade architecture. So it had to start very slow. So the way we did it is whenever we sold an appliance, we bundled the in it a software blade.

So inherently, everyone that bought a new appliance received in it some of those services and on the second year if they use this, they would have to pay again. So the second year was the [test]. Our expectation was that approximately 15% would actually try it, like it and buy.

In reality, we see higher than 40% conversion which was a great surprise. On top of it, we see a significant conclusion to a La Carte blades meaning the people that didn't buy new appliance or bought it but didn't get that specific service on that appliance and the one to get that service. And therefore we call A La Carte blades people paid fully if they want and we see a significant increase there as well, expected over time because more people now have the Software Blade Architecture therefore they can buy this service before they couldn't buy it.

They needed to have the Software Blade Architecture. Total blade at the end of last year run rate Q4 times reached $200 million is continue to grow very fast, very fast meaning is not 10%, its not 20%, its not 30%, its going very fast.

And number one blade with IPS, not surprisingly because it’s been launched first and it’s a great success, it’s considered to be a top product in the market also in terms of best [breed] not only pricing. Application control is number two blade, its actually growing more than a 100%, it’s going very fast, we have already more than 10,000 blades that's been sold to application control.

And I think we reported I hope I am not saying the wrong number 40,000 IPS. So it’s quite a success and Antibot has been launched so as we start. So it’s a great success now whenever how many customers using what, it’s very hard to tell. And I think of the installed base it can actually buy it, it’s still around 50%; 50% still doesn’t have Software Blade Architecture.

So the potential is first to cover which we'll get there anyway 100% of the installed base is to have the Software Blade Architecture. And then to sell more blades as I think we are really early days. Think about it that way if our run rate is $200 million just the IPS market is 1 billion market. The URL is truly another billion. Application control probably $300 million and $400 million, and EOP $500 million. So take all of those $3 billion opportunity the potential is great.

Walter Pritchard - Citigroup

But it does sound like so I am just going to running through doing some quick math, we are kind of about to redo our models to figure out this more installed based upgrade or installed based adoptions suppose you are looking at new sales which you are now going into the installed based more so, half a million gateways to me seems like kind of where Check Point has been what were the installed bases, you have got 40,000 or 50,000 it sounds like based on IPS and probably a lot of overlap with Application Control and only about half of the installed based can actually take the blade. So you are pushing north of 10% of your gateways or so that are using this as a primary product, is that math kind of let me kind of (inaudible) on the slide, but that seem like it has become meaningful.

Tal Payne

So it’s becoming meaningful of course I mean $200 million take our revenues in the corporate earnings becoming meaningful, and it’s still smaller comparing to the potential. I mean think that you reached $200 million run rate after two and half years that was at the end of last year so it was two and half years, it’s quite fair. So it’s a (inaudible) business for us that’s why it was so important for us to allow customers to have such a high throughput even if the base price in the SP in the short run because the throughput is the trick, you may have the throughput that can adopting the future with blade but if you want the blade they download it and they can’t work with it we (inaudible) the object.

So the goal was let’s open that gate, let’s allow them the throughput so when they try because think about it just a software module, just download it. So that was the important thing. Now in terms of the 10% that you calculated over five years, six years I mean we had many software revisions obviously, we have the statistic but that’s about five years, six years to cover majority of the installed base to move from the older vision to the newer vision.

So not surprisingly, we are about midway and we need another two years, three years to get basically to the 100%. So these 60% or less of the potential buyers for new blades, the existing 50% is far from buying the blades you see the [volume] up.

Walter Pritchard - Citigroup

Right. That is meaningful I guess my point was…

Tal Payne

It is meaningful already.

Walter Pritchard - Citigroup

Yeah got it and I guess will you step back and think about sort of the model long-term, I think there continue to be a lot of focus on Check Point on the product revenue piece and I think we are talking about here the majority of this value in growth we are see in the subscription line.

So I mean this is a company that can grow the rates that you want to see the company grow with product revenue being growing as we are today given lot of the value is coming outside the product. I am just trying to make sure we set expectations (inaudible) correctly so it does feel like there is a lot of focus on product and you have a lot of the value is in other revenues?

Tal Payne

I have been saying for two years look at the total growth. There is obvious shift from product to services regardless to the [SP] which is a different topic right, but in general every new product that we launch in mid-2009 was as a service, the subscription. Look at IPS was a service, the EOP was a service, Application Control was a service, the Antibot that just have been launched a few months ago were a service.

So all the new products are brought as a service. The only thing that state as a product is the appliance. The appliance is linked basically to the [SP] and the growth in the number of units. Now this industry (inaudible) is growing industry in terms of percentage of units. Everybody already have a firewall while I remember that.

So if they [refresh] that effects the number of units that you sell in the competitive environment obviously, now our competitive environment as well that’s why we increase the number of units otherwise the number of units will go down not that is right, so it is obvious. Their speed depends on the throughput and in the customer decisions. So when we launch a new product obviously it affects that standard mix shift and definitely you are right in the sense and I think as a general comment, I would always look at the total.

Now look at the few parameters not one ever. Look at the total growth, look at the product growth and understand where it is coming from, look at the service, its double digit mainly because of the annuity blade, that they updated maintenance, regular updated maintenance because we have a huge installed base. It's ongoing in the double-digit naturally. The growth of the double digits comes from the annuity blade. If you take out the 200 million and calculate, you will see the single digits. So, I think first you look at the total and understand, what's the growth engine.

Walter Pritchard - Citigroup

Got it. You mentioned Refresh and not been important to the product revenue. You know, best I can tell we had a recession in 2008 and in 2009 and that probably tamped down the Refresh activity coming out of that and probably had some catch up of that Refresh activity. In parallel with this you've had the Nokia acquisition you did and there was some uncertainty in that base that when you bought them, then gave the customer certainty. Could you talk about, I think of Refresh is almost like a sine wave? Where are we on that, Refresh path?

Tal Payne

The truth is that we don’t know.

Walter Pritchard - Citigroup

Okay.

Tal Payne

Remember that we started to sell appliances only in 2008 and we purchased the Nokia business in 2009. So we don’t have the historical dates of the acquisition of the appliance by the customer because in June 2008 we sold the software and the customer purchased the hardware from someone else. So we don’t know how old these boxes, right?

Walter Pritchard - Citigroup

Right.

Tal Payne

I don’t have the statistics to provide you right and obviously the number of units increased and it maybe to what period right now in that regard.

Walter Pritchard - Citigroup

Yes.

Tal Payne

And I know that each year, since 2008 that we did sell, we sold more units, more appliances. Therefore the Refresh opportunity should increase each year for us, just from our data. Can’t talk about market data?

Walter Pritchard - Citigroup

Yes.

Tal Payne

For us it sold more in 2009 than in 2008 and more intent than in 2009 and so on. So each year there should be a greater percentage of the Refresh especially now that you have such a high throughput boxes that allow customers to make a leap and then get more services and therefore reduce the total cost of (inaudible).

Walter Pritchard - Citigroup

Got it and drilling a little bit in to that Nokia base, so you did release, the product you released early this year, did sort of bring the technology into the mainstream Check Point appliances that the Nokia customer is looking for. Can you talk about what sort of buying activity you seen in that Nokia customer base, but what you saw before that release and since that release.

Tal Payne

Yeah so maybe I'll remind that in mid 2009 we purchased the Nokia business and we said it about 80,000 units, (inaudible) unit and Nokia has a different operating system. So they had -- if so was Check Point had this plus and their customers had two choices over the past few years, either to adopt this flat operating system and then they can buy Check Point products, be it the UTM or the power family that was Check Point historical family.

Or they stay in the Nokia operating system and over time when they needed to refresh their hardware, always they needed to have more throughput then they moved up in the IP series which is the Nokia family because they couldn't move to our family.

Obviously it limited the throughput capability and because that family didn’t move forward on the one hand and secondly they didn't enjoy many of the new features that when presented as not part of the software. So for example many of the software blades were not operational on this operating system.

We work and the reason they did it by the way because they love the IPSO operating system and they loved the features that were important to them. So what we did now, we launched the GAiA. GAiA is a consolidated operating system; they took the best of both worlds. They took the things that they loved about the IPSO; the great things in this plant added more 100 new features and came out GAiA a few month ago.

Which means for the Nokia customer is they are out now to move to the high throughput appliances to enjoy the software blade and still to enjoy their features that they love in the operating system of the IPSO. So now customers are looking at it, it is a process which can mean that some of them delayed the appliance acquisition because when you need the refresh, you need to choose which box you need to know by moving to the GAiA and therefore I can move to the new appliances or might stay in the IPSO and just keep on moving up in the IP series.

So some of them might be delayed. I can’t tell you how much because if my number of units have been reduced, then I can tell you with each sale point and now we sell 18, may be 2000 is waiting, although a number of units increased so much that I can’t measure how many are waiting.

Walter Pritchard - Citigroup

But is it fair to say that was before GAiA was at an impediment to selling into the Nokia base and now that impediment is not there, is it similar to that?

Tal Payne

No actually so the same number of units in general, we saw a similar number of unit in the Nokia family each quarter. In Q1, with Q4, Q1 there was a huge drop, but also there was a drop in the power and the [UTM] because there was a huge surge in the new units. So and the total increase in over 20%, so I can’t color and tell you how much is actually waiting.

Walter Pritchard - Citigroup

Sure, got it. So I just want to shift here and talk a little bit about the competitive landscape on and into the second or third security company we had here at the event, so we have had kind of a window into this from different angles. We would just love to hear your take on who you are seeing as the most competition from, where you think of market share is shifting in the States and go into that discussion?

Tal Payne

So I will separate the market in two parts. The main market which is the, you can call it [firewall] plus for the UTM market, whether the main competitor is a Cisco unit and in the mid low end Fortinet. And that remained that way really. When you look at the -- and by the way probably the Cisco did pretty good I think this quarter. They grew like 8% right. So they did okay and I think in the last few years they are the ones that are losing market share and they are losing mainly to Check Point and to Fortinet, that's my thought.

Okay and when you look at the adjacent market and remember this is something that need to be understood because this market, the security market in general going slowly to the consolidation process. So all these adjacent markets, for example the overall market and the IPS market, some of them remains separate and they will remain separate for a while. But some of starting to consolidate, it depends on the level of the customer.

So many customers don’t buy separately, but right now it is part of the main market. So if you look at Check Point, we have an IPS blade. So customers can choose IPS, it is part of the main market. It was costing significantly less and it doesn’t need an appliance. So when we compete for that blade or customer consider our blade as part of the main item, then in that bid, you will see typically Sourcefire or ISS as an example.

If we bid for (inaudible) featuring blades which is that adjacent market that's partially consolidated you will see probably what sense we quote and probably few others right, but I am just giving you an example. When you compete with a application control blade which is just another additional blade, then you will see Palo Alto and you will see may be few other players.

I mean today that is like ten players that have application control. It is not like two years ago when only one player had it. So now everybody is playing in that market. So it depends which blade we are talking about. So in the main market, the main players remain the same. In the adjacent market which are basically in a sense likely under attack because everybody that have like from the main market added some of those solutions.

Some of them added only three solutions, some added 10 solutions. Those guys are now fighting, so now you will hear everybody saying that they are seeing everybody. It is correct because it depends what the customer is buying, which point solutions they are looking for. You can see the main players and you can see the point players; it depends what the customer believe.

Walter Pritchard - Citigroup

So it sounds like the larger vendors have been shared donors specifically, Cisco in the past. Do you see, I guess, sort of as part of your growth plan, do you see continued market share gain? Is that necessary to drive the growth you’re looking to drive?

Tal Payne

I don’t think this is the main growth for Check Point at least.

Walter Pritchard - Citigroup

Okay.

Tal Payne

The main growth for us is the software blades and the additional volumes.

Walter Pritchard - Citigroup

Okay. Got it.

Tal Payne

I mean you can see very clearly from our numbers; I mean you can see the software blades and how much it contributed to the growth, right, from 2009. So we were very clear. The growth for us came from the increase in the ASP as a result of adding more services to customers; majority of the sales coming from existing customers, not new customers, obviously revenue customers, but our installed base is big, so most of the sales will come typically from selling to the existing installed base.

Walter Pritchard - Citigroup

So, when you say growth faster in the market, it's not a picture directly; it's more value in your base and...

Tal Payne

Yes, basically taking more larger part of the budget of the customers. So it's new products, the same products. It's new product, taking larger share of the budget, while on the same time saving budget to the customers. So it's like win-win. They are saving budget because they can put everything in one platform and we're getting larger part of the budget.

Walter Pritchard - Citigroup

I am going to open it up in about three minutes to questions. So if anybody wants to ask questions, think of what your question is? On M&A, I think every time I met with you, you talked about, you would like to do a larger deal and there is large deals that happened in the sector and it's never Check Point. I mean, you’ve got a handful of small deals and that seems like it continues to be your primary use of capital from an M&A perspective, the smaller deals. Can you update us on, is there any increase likelihood here of a larger deal and prospects of…….

Tal Payne

Some evaluation is out there now; I don't think we have enough cash to buy it, you need the confidence right. But I mean we have only 3 billion and we announced the buyback program of $1 billion just recently over two years. So we increased significantly the buyback program.

And I think we are very clear, we are very interested in M&A, it can be very small or very large, the sky doesn't matter in that regard; we are open to small ones and the large ones. It can be small technology, and you’ll see the other things three or four like this in the last few years and we very interested in interesting technologies; it’s not always there right, but you can see we're doing on average about one a year, right, so in some years we’re still zero, but on average about one a year.

And we are very open to those; those are easier acquisitions, because the value is dependent on what we believe we can do with that technology, because we have installed base. So the technology that we feel is interesting to a significant portion of the customer then it’s an easy acquisition and the values also is not likely; typically its not hundreds of millions of dollars.

When look at the larger acquisitions then the considerations are, it has to be good technology or an interesting penetration into a specific market or a large installed base, maybe in consideration and then if you look at the part of your business model and to see what I can do with it in terms of synergies and then the buyer had to make sense and unfortunately in many cases this is the process that doesn’t makes sense.

Walter Pritchard - Citigroup

And about the end point market, I think I ask you about this every time, I get the same answer, but I wanted to check and see for any update; that is a market that there probably are some larger acquisitions that you could do, I am not talking about buying some assets, but talking about some of the mid sized companies in the end point and it does feel like you pulled at this from where you were years ago in end point, but that does seem like if you were to spend hundreds and millions of dollars that's where that’s where it would be.

Tal Payne

We are open to that as well and we are investing it clearly it’s like not visible but we invested a lot of work still a lot of work internally into adding an edge to the endpoint product and we are making progress but I can’t report anything exciting because the numbers are not good enough.

So I can’t say great if not pretty stable which is good but it’s not moving up, so we need to do a few more things in order to break that market, that market is very different from ours because it’s a lot of it commoditized right now and in order to make a difference you need to bring and we did bring a lot of differentiator but obviously that’s not even that is not enough, so we need to group enough differentiated to break into that, acquisition can be considered and is considered for the last four years.

I mean when I say we are looking for a position we are looking in all the areas as you know it’s does not that many in good security companies so the universe is small anyway. So we are opening our options everywhere till now we didn’t find anything that made sense from those aspects.

Walter Pritchard - Citigroup

Got it. We are going to pause for a second to see if there is any question. I think far right hand side there is a question.

Question-and-Answer Session

Unidentified Analyst

You said today there are about 10 different players in application control and about two years ago there was only one, who is that one player two years ago?

Tal Payne

(Inaudible).

Unidentified Analyst

Okay. So now you are saying that it’s about 10, okay thank you.

Walter Pritchard - Citigroup

Hold on let me just get you the microphone, so we get on the webcast.

Unidentified Analyst

How will it impact your business if software defined networking emerged as architecture?

Kip Meintzer

So from our standpoint, one of the strength that Check Point has is we originated from the software side of the business, so we are not hardware dependent. So we don’t have (inaudible) we don’t have things along that line, that’s why we are so quick to move into the virtualized solutions, we have virtualized products since the year 2000 and we also are very quick to deploy on the VMware platform.

So I think it will depend on how things shake out with the [FDN] but I think we are well positioned as that moves forward to actually participate that. So it is very early days and we have people going around [FDN] as a very loose acronym or loose terms but I think we have to see our product yet before we can actually be more clear on how we participate.

Unidentified Analyst

How fast do you guys think that security market is growing and over what timeframe? Thanks.

Walter Pritchard - Citigroup

How fast is the security market growing and over what timeframe was her question?

Tal Payne

I think it depends which year right. So if you look at the last few years and I am referring to analyst results, we are talking about in the recession it was a single digit negative for according to some reports and in the good days it grows in the mid-single digit, it can be high single digit, it can be of my be some years even the lower double digit. So it depends which year.

Unidentified Analyst

On a normalized basis would you say that?

Walter Pritchard - Citigroup

On a normalized basis?

Tal Payne

Like an average.

Walter Pritchard - Citigroup

Yes, five years, three years.

Tal Payne

Probably, mid-range or mid-single digit.

Kip Meintzer

So if I can add to that, there are parts of the security industry that are obviously growing at a much more rapid pace.

Unidentified Analyst

Could you take another step at helping us size how large the blade, your blade revenues might be in any given amount of time lets say in three years and without giving specifics as you cannot talk about specifics, it is still faraway which kind of the range would be disappointed if revenues were X and would be, you know, thrilled that the revenues were X or Y?

Tal Payne

It's a good question and I think if you take all the blades that we have as of today and exchanging because every year we introduced new blades. Probably the size of the market, separate adjacent market is around $4 billion, that’s that market and we have about $200 million out of this. Now, two things happen and that’s what I am trying to do with you right now. When you speak of IPS as example, when we launched the IPS, we felt that some of it or most of it will come from the IPS market. The IPS market was a $1 billion market. Then the IPS market will go down and our share will go up because we deserve our share.

Now remember that the secret in the [soft] here that we gave them like best briefed product but because you don’t have to buy an appliance, then we can try to significantly lower in the price because when you sell a point solution separately, the customer have to buy an appliance. So the vendor has to fund the appliance, that’s all the business that he has. So he has to sell it for $30,000, $40,000, $50,000. When we sell just the software blade because the customer already have our gateway, then all he needs to buy is a software module. So I can price it in $5,000; $10,000, depends which blade. So in terms of pricing, it shrinks the size of the market.

In reality what happened so far, we increased significantly and while the IPS market is still growing. So what is actually happening, is it going up to full?

Kip Meintzer

It's hard to tell. There is no numbers outside of the couple of players.

Tal Payne

Yeah, but so far it's reporting nice results I guess. So, lets us even say it stays the same. Okay? Just from the sake of the discussion. So if you look at our results, where the dollars is coming from, probably some of it is from taking from the existing market because we see the competition there. So we know we are winning a lot of this there. On the other maybe there was many players out there in the market that until today couldn't afford to have an IPS. So they are buying for the first time in IPS, so it can take the sizes of the market down or you can make it more valuable to many people that couldn't afford it before.

So I think in general the opportunity if the market stay at the same size on the one hand growing because it's more affordable to many people that couldn't do it. On the other hand shrinking slightly there in terms of price pressures in the existing market, a 4 billion opportunity. There is no way that why we wouldn't get a big chunk of that market. Just like we are market leaders in the main market, we should get our one share there.

Our advantage is not only we consolidate or reduce your cost, but also the fact that we do provide you in all this blade and best (inaudible) blade. If you look at each blade and majority of them, we are the top two, maybe the top three. So we are in the top 11, each one of those. So I see no reason why we don't materialize a significant potential and become a leader in those adjacent markets.

Unidentified Analyst

Just one quick one. In the main market as you define it, what do you attribute the share gains by yourself reporting that versus let's just say Juniper, there is something structural that you are doing, the execution, is it difference of product, is it price, what is the share gain that you are going to buy?

Tal Payne

I think such software, we are a pure security player. Everything we do, our 1000 R&D people all they do is security. When you just say Cisco and Juniper, their focus is by nature I mean I completely understand that their focus is where the main market for the money is $5 billion market is not that large for Cisco. Their focus, that was equipment they then sell on. So it's important for them, very brilliant, but product wise, they are behind in the product.

They have a very small or narrow product portfolio, when it comes to security solution and therefore they are behind in their security solution and the same applies for Juniper.

Unidentified Analyst

May be I will ask you the next one on – I get a lot of questions on your use of the cash. So the company has clarified that a bit in the last three months in terms of the expanded buyback. So could you talk about, you got 3 billion roughly, three point something billion in cash and a lot of that is excess cash, how much cash do you need to run the business and how you are thinking about what uses of that cash may be beyond what you need to run the business?

Tal Payne

I think the main use is -- to run the business you don’t the need the cash for visibility to the customers, right because we are very cash flow positive. So you don’t need it for working capital really, a small amount may be. And so the main use is, obviously you need cash in your balance sheet, but you need M&A. And see we are doing buyback and the discussion of buyback versus dividend every year we have the discussion we have so far to continue with buyback.

So as you know and I think it’s majority of the shareholders preference at this moment of time. So we are going with the buyback and the remaining we want to use it for a opportunity for M&A. If we see a good company and it justify the valuation, we want to be able to do it. So I will say M&A buyback and cash balance that is needed is part of the business.

Unidentified Analyst

And on the buyback I think some investors looked at your stock performance during the second quarter and then how much you bought back and sort of question why didn’t the company buy back more stock in the second quarter, when the stock was depressed. Can you talk to us about the process you go through for buyback authorization and with the new authorization, how are you guys, not necessarily today in the market, but what is your ability to buy back stock in the near term.

Tal Payne

So in general typically, we prove an annual for when we know it was 300 million, it was 200 and then it increased to 300 million and typically we do it in a straight line over the years, that is simple. And this year we did it different. When we announced it, we announced up to $1 billion, up to 2 years which provides us more flexibility as of the timing and also the quarterly amount that is approved by the board, it is much more flexible. So there is more flexibility as a result of exactly what you said. So it is slightly different this time.

Walter Pritchard - Citigroup

So you as a CFO, and (inaudible) you have more flexibility than you did even in Q2?

Tal Payne

Yeah.

Walter Pritchard - Citigroup

Got it okay. I think we have reached the end of our allotted time here. I am going to leave it at that. Tal and Kip, thank you very much for joining us today and thank you all for attending the conference. Have a good day.

Tal Payne

Thank you.

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