Check Point Software Technologies Ltd. (CHKP) Q4 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Check Point Software Technologies Fourth Quarter and Fiscal Year 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kip Meintzer, Head of Global Investor Relations for Check Point Software Technologies. Thank you. Sir, you may now begin.

Thank you, Jess. Good day, everyone. I'd like to thank all of you for joining us today to discuss Check Point's financial results for the fourth quarter and full year of 2013. Joining me on the call today are Gil Shwed, Founder, Chairman and CEO; along with our Chief Financial Officer, Tal Payne. As a reminder, this call is being webcast live on our website and is being recorded for replay. To access this live webcast and replay information, please visit the company's website at checkpoint.com. For your convenience, the conference call replay will be available through February 4. If you'd like to reach us after the call, please contact Investor Relations by emailing kip@checkpoint.com or by phone at +1 (650) 628-2040. Now before we begin with management's presentation, I'd like to highlight the following items: during the course of this call, Check Point representatives will make certain forward-looking statements. These forward-looking statements may include our expectations regarding the introduction of new products and programs and the success of those products and programs, our expectations regarding capital expenditures and our expectations regarding our business and financial outlook, including with respect to the effective tax rate and currency rate data rate fluctuations. Other statements, which may be made in response to questions, which refer to our beliefs, plans, expectations or intentions, are also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Because these statements pertain to future events that are subject to various risks and uncertainty, and actual results could differ materially from Check Point's current expectations and beliefs. Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in Check Point's latest annual report on Form 20-F. As a reminder, Check Point assumes no obligation to update its forward-looking statements except as required by law. And our press release, which has been posted on our website, represent 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. With that, I'd like to turn the call over to Check Point's Chief Financial Officer, Tal Payne, for a review of the financial results.

Thank you, Kip. Good morning, and good afternoon to everyone joining us on the call today. I meet you once again to begin the review of a great quarter. Our revenues for the fourth quarter increased by 5% year-over-year with a 19% sequential increase in deferred revenues. Non-GAAP EPS grew 8% to $0.98 at the top of our guidance. Before I proceed further into the numbers, let me remind you that the fourth quarter and full year 2013 GAAP financial results include: stock-based compensation charges; amortization of acquired intangible assets; the related tax effects; the impact of tax settlement with the Israeli Tax Authorities. Keep in mind, the non-GAAP information is presented excluding these items. And now let's take a look at the financial highlights for the quarter. In the fourth quarter of 2013, our revenues reached $387.1 million compared to $368.6 million in the fourth quarter of last year, representing an increase of 5%. Revenues were towards the high end of our guidance. Product revenues returned to growth this quarter, increasing by 4% to $156.2 million compared to $150.9 million last year. The growth was driven mainly by the success of our data center products, the 13500, the 21000 family and the super high end 61000. Our software update maintenance subscription revenues reached $230.9 million, representing a growth of 6% year-over-year. The growth was driven mainly by our annuity software blades that are recognized as subscription. We continued to see great success in our annuity blades, led by our threat prevention blades and Application Control. Software blade revenues increased by 28% year-over-year and are now 25% of our service revenue. Deferred revenues as of December 31, 2013, were excellent at $671.6 million, an increase of $81.9 million or 14% over December 31, 2012. Sequentially, the deferred revenues increased by 19%. Revenue distribution by geography for the quarter was as follows: the Americas contributed 47% of revenues; Europe contributed 37%; and Asia Pacific, Japan, Middle East and Africa region contributed the remaining 16%. From a deal size and quantity perspective this quarter, transactions greater than $50,000 accounted for 72% of total order value compared to 67% in the same period a year ago. We had 75 customers with transactions greater than $1 million compared to 62 customers in the same period last year. Our non-GAAP operating margin this quarter continued to be strong at 59%. We continue to increase our headcount, mainly in sales, R&D and technical support. In addition, we were slightly affected by the changes in the dollar exchange rate against some currencies around the world. Our GAAP effective tax rate for the fourth quarter was 13% versus 21% in the fourth quarter of last year. During the quarter, we reached a settlement with the Israeli Tax Authorities with respect to the release of all trapped profits and the settlement of tax disputes relating to prior tax years. The settlement was paid in 2 payments: first payment in the fourth quarter of 2013, this quarter; and the second payment in the first quarter of 2014. The company had sufficient provisions in the book to cover the settlements, hence, the net effect on our P&L was a positive income of $15 million. The effect was eliminated in our non-GAAP tax expenses. Therefore, our non-GAAP tax -- effective tax rate for the fourth quarter was 19%, in line with the previous quarter. From next year, the Israeli regular corporate tax rates will increase from 25% to 26.5% and the preferred tax rate from 12.5% to 16%. As a result, we expect our effective tax rate to increase slightly in 2014 and to be between 20% to 21%. GAAP net income for the fourth quarter of 2013 increased to $194.1 million from $174 million in the fourth quarter last year. GAAP EPS increased to $0.99 from $0.85 per diluted share in the same period last year, representing 16% growth year-over-year. Non-GAAP net income for the fourth quarter was $192 million or $0.98 per diluted share, up from $185.1 million or $0.91 per diluted share in the same period last year. Non-GAAP earnings per share were at the top of our guidance, representing 8% growth year-over-year. Our cash from operations this quarter was $58.2 million. Net of the tax payment for the settlement with the Israeli Tax Authorities, our operating cash flow increased by 13% to $228 million from $202 million last year. Collections continue to be very strong, and our DSO was 69 days, similar to the previous quarter. During the quarter, we purchased approximately 2.26 million shares for a total amount of $135 million. Now let's take a look at the 2013 year highlights. For the year ended December 31, 2013, revenues were $1.39 billion, an increase of 4% compared to $1.34 billion last year. Non-GAAP EPS for 2013 was $3.43, an increase of 8% compared to $3.19 in 2012. On the operating side, we achieved a non-GAAP operating margin of 58% for the year. As a reminder, over 40% of our expenses are in local currencies other than the U.S. dollar. In 2013, the dollar weakened against our main local currencies. Based on the current exchange rate, we expect 2014 expenses to increase in approximately $5 million compared to 2013. For the year, cash flow from operations, excluding the net tax payment for settlement in prior years, has reached a record of $862 million, an increase of 6% compared to last year. Our cash balance reached $3,630,000,000 at the end of the year. In 2013, we repurchased approximately 10 million shares in an aggregated amount of $538 million, which represent an average repurchase per quarter of $135 million. We believe that our market leadership and long-term growth prospects make this an effective time to further utilize our cash and increase shareholder's value. As such, we have announced today an update plan effective immediately to repurchase up to $200 million a quarter, up to an aggregated amount of $1 billion. The quarterly amounts may vary. Now let's turn the call over to Gil for his thoughts on the fourth quarter.

Thank you, Tal. I'd also like to thank everyone for joining us on the call today. I'm very excited with this quarter results. This was a spectacular quarter. We outperformed our goals and delivered sales results that are reflected in our customer wins and deferred revenues that we haven't seen for more than a decade. We've seen strength in many areas. From a product perspective, our data center appliances performed extremely well, led by our new 21700 Appliances and the 13500, which was launched just in Q3. Our 61000 super high-end appliances also had a record quarter. Software blades continue to perform very well with growth accelerating in the fourth quarter. Much of it comes from our next-generation threat prevention software blades package. We continue to focus on expanding the depth and breadth of our security technologies with additional software blades. In 2013, we launched the Threat Emulation software blade, which is powered by our cloud service. The Threat Emulation blade discovers new threat which are not discoverable by other existing technologies. This is accomplished by opening incoming files in a secure environment and analyzing their behavior automatically. Earlier in the year, we launched a new generation of our small business and branch office appliances, the 600 and 1100 Series Appliance received amazing review from industry observer and have been enthusiastically embraced by customers. This has resulted in a very strong growth trajectory since their launch in Q2. We've also delivered our latest release of software, the R77, during the year and just now, the R77.10 update. This version includes more than 50 product enhancements, including the new ThreatCloud Emulation Service, Check Point HyperSpect performance enhancing technology, Check Point Compliance Software Blade, mobility, virtualization amongst others. We continue to develop and introduce new and innovative threat prevention solution. In addition, we continue to expand our offering in the data and mobility area. We believe that cyber threats and mobility are 2 of the most important areas in security these days, and we intend to provide leading technologies in these areas to keep enterprises secure worldwide. This brings me to the financial outlook. To your normal regular caveat, it is always hard to predict the future. There are many factors that should weigh in. The increased need for cybersecurity is an important factor, yet at the same time, the economy can warrant a more conservative approach. As always, we take a realistic approach that has risks in it, as well as potential of upside. For 2014, we expect revenues in the range of $1,440,000,000 to $1.5 billion and non-GAAP earnings per share in the range of $3.50 to $3.70 per share. GAAP EPS is expected to be approximately $0.32 less. For the first quarter, we expect revenues in the range of $330 million to $350 million and non-GAAP earnings per share in the range of $0.79 to $0.86 per share. GAAP EPS is expected to be approximately $0.08 less. I just want to repeat again the guidance for the year. The revenues are expected to be in the range of $1,450,000,000 to $1.5 billion, and the non-GAAP earnings per share in the range of $3.50 to $3.70 per share. Thank you, and I would like to open the call for your questions.

[Operator Instructions] Our first question is coming from the line of Gregg Moskowitz with Cowen and Company.

Looking at some of the deal metrics, the deal sizes over $50,000, the deals that were over $1 million, that clearly went up into the right and it sounds as though data center appliances are taking more hold. What I'm wondering is if this is, in your view, more of a seasonal uptick where that might revert in 2014 or if you think there's some sort of change or shift in the buying behavior from customers.

I think it's hard to predict the future, clearly, and I think that's not all of it reflected in the numbers. We had a very good Q4. I think some of it is attributable to the fact that we've worked throughout the year and delivered amazing wins, I hope, which is a good sign for the year to come. I mean, we just had our sales kickoff meetings in Europe and in the U.S. last week and this week. And I think the overall atmosphere, they're quite positive. On the same time, I don't want to be overly optimistic, and I think we are not changing gears our guidance or predictions beyond the overall rates that we've seen throughout last year.

Okay. And then I realized it's somewhat early, but with Threat Emulation, what trends are you seeing so far in terms of deployment? For instance, is it more enterprise or mid-market? And also, which verticals or geographies are moving forward thus far?

I think it's too early to say. I think in terms of sectors, we've seen -- all sectors, we've seen relatively high-end customers deploying it so far, and I've seen all the sectors. Again, manufacturing. I mean, everything -- I mean, all the different companies. But again, I believe it is too early. Unfortunately, it takes the market, from my perspective, too long to ramp up. And after 1.5 quarters, it's still too early to give statistics that will be meaningful.

I would just add that, if you remember, we launched the Anti-Bot somewhere in the middle of last year and...

2012.

2012, yes. And I mean, we've seen it in the last 3 quarters really increasing nicely and already crossing a few millions of dollars a quarter. So it takes some time to start to see results of the new technologies.

Okay. And if I could just ask one more, either of Gil or Tal. Since 2014 is already shaping up to be an inquisitive year in security, I'm wondering if you could update us on your thoughts of the M&A landscape and whether Check Point might look forward -- might look to move forward, excuse me, with an acquisition this year.

I mean, we do look forward for that and I think we're investing more resources now than ever in finding the right target. It's not easy to find the right company. There are many interesting companies and many interesting technologies. Very few often fit well to our portfolio and fit well to scaling into very large number of customers. I am very proud, however, in what we already have. I mean, if we look at our new technologies and our ability to deliver innovative technologies, there's a huge room for growth to get our customers to deploy it. I mean, look at our Anti-Bot technology. Many hot start-ups in the cyberspace are hardly delivering what we are delivering with the Anti-Bot. The Threat Emulation that we have shapes up to be very high quality. We just ran some benchmarks and got amazing results when we try to do some really advanced comparable testing against some of the most known in the other competing offers from others and our results. We're really, really much better. I think we'll, in the next few weeks, we'll probably publish some of that. So I think that beyond -- I mean, yes, I'd like to acquire some companies and we are looking at that heavily. On the same time, I think we have a lot of potential by reaching more of our customers with our own technologies that are already in the marketplace.

The next question is coming from the line of Michael Turits with Raymond James. Michael Turits - Raymond James & Associates, Inc., Research Division: Can you make a couple of comments on thoughts on expenses going the year? Obviously, getting back into it somewhat from your EPS guide? But you mentioned something about the FX impact. Can you walk through what you think the FX impact on expenses will be and also where you might be investing more from an operating perspective as well?

Sure. So first, we spoke about it already from the middle of the year that we invest -- we continue to invest and invest more in sales, R&D and technical support. You already see it in Q4, some of the effect, so that's like regular, ordinary course of business. In terms of the dollar, it's already affected us already in 2013 in a more minor way. And when I'm looking at the current rate for the dollar against the currencies that are relevant to us, then I said it's approximately $5 million effect on our expenses on 2014. So that's like a $0.02, $0.03 or so, right? That's the effect of the dollar. And in the taxes, if you remember last quarter, I told you the taxes should move up in about 3%. The good news, it's now steadily moved up in about 1%. So that's the 2 update that I gave this quarter regarding next year. So taxes should be around 20%, 21%. Dollar effect is at $0.03 or so. So far, based on the current rates, I don't know what will happen with the rate. If they improve, it will improve our situation. And if it will deteriorate, then it will increase our expenses. Michael Turits - Raymond James & Associates, Inc., Research Division: Okay. If I could -- a fundamental follow-up. Just could you talk a little bit about your entrance into -- to incremental markets to an extent, both the SMB market and the carrier market, which you talked about a little bit in the past?

I think we are in this market, but I think we have a lot more potential in both. In fact, we are investing a lot more in them. We started a new sales organization for the SMB market, and we are doing all the right work now to stop it and give dedicated people that will focus just on the right distributors and resellers for SMB and give them the right attention. We are assigning more executives to the telco space, so we'll have the right level of relationship with the account on a worldwide basis. And I think I see a lot of potential in both of them. And we had some success with the 61000 in the fourth quarter that's reflected in that. And clearly, I think we are seeing some already early success with the low-end 600 Series and 1100 Series at the low end of the market.

The next question is coming from the line of Sterling Auty with JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: So on the product side, the strength in the data center, can you walk us through how much of that is upgrade replacement sales of units and how much of it might actually be greenfield as enterprises or other might be building out additional data center capacity?

Yes. So I said it's usually low but a lot of our sales are coming from our existing customers, be it refresh or selling, upsell expansion of networks. The SMB unit that we talked about, the 600 and 1100, many of them are new opportunities with existing customers that are putting us also in the remote location and not only in the head office, that's one comment. And second, we see quite a lot of new wins in a competitive environment that we are replacing our competitors. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Okay. And I want to touch upon the share repurchase. So at $200 million a quarter, it seems like you're barely spending more than the cash flow that you just generated in 2013. I thought the opportunity in the tax program in terms of the settlement was going to give you a preferential rate to actually do something incremental with the cash on the balance sheet. At this rate, you're not actually taking down the cash balance at all. And with $3.6 billion, that seems like much more than what will be needed for any particular acquisitions that you might be doing. Why not do something even more incremental like maybe even a onetime share repurchase for $500 million or $1 billion on top of what you just announced?

Sure. So I'll remind a few basic things that are leading us in those decisions. Number one, goal for our cash is to enable future growth of the company and M&A. So we haven't seen M&A in the past, we might see in the future. As you can see actually from valuations in the market over time, the valuations are going up and you need more cash to be able to have M&A, assuming it's fitting to the company's strategy and future growth. So that's number one goal for our cash. Number two, which is in line with our behavior since 2003, we would like to bring back shareholder value through buyback/dividend. Majority of our shareholders prefer buyback, that's why we continue with buyback. We moved from $200 million to $300 million to $0.5 billion and now up to $800 million a year, which is quite a significant increase. It's pretty much in line with the operating cash flow, you're right. And we think that's the appropriate use of cash for the company. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Okay. And maybe last one to slip in. You mentioned the 600 Series and the work in the branch office and also into the mid-market. Do you feel that effort is fully staffed at this point? Or is there additional investments that you plan to make in 2014 to broaden it out?

It's definitely not fully staffed right now. We intend to hire many people to strengthen that. I think we can do more. And I think we plan to hire a lot of people to help in that.

The next question is coming from the line of Aaron Schwartz with Jefferies.

I just had a question on the guidance to play devil's advocate here. If we look at the deferred revenue growth here over the last 12 months, it was very strong at about just under 14%. Can you just help me reconcile that with your top line growth expectations for '14? It seems like with the growth there, the reacceleration and the deferred growth over the last 12 months, that potentially you could see some more top line growth over the next 12 months or is this just a conservative outlook at this stage in the year?

I guess, I would say it's realistic. You're absolutely right that the growth in the deferred is much faster. So yes, it was much faster. And it's not like it's for the next 20 years, it is for next year. You can see the difference between short term and long term. Having said that, Q4 is typically the strongest quarter of the year. So we think we should be prudent and provide the guidance that we believe is realistic, which means it's not the best scenario and not the worst scenario.

And I think we are modeling this quite right. So we are not sandbagging or anything that's unrealistic here. I mean, I do like to think, and I hope more than anyone on the call, that there's upside to what we are doing. But at this point, I can only say that what we've done is based on very, very realistic models and there is no sandbagging or hidden reserves out there.

Okay. And I think that I've got a second question. You talked quite a bit about the strength in the data center area and the higher-end products. You also had a strong deal metrics with $1 million plus transaction. Presumably, that is -- or they're correlated with the higher-end products contributing some of the larger deal flow there. The question I have is that given the sequential strength in deferred here, are you seeing, I guess, higher revenue deferral rates on your data center products or your larger product sales? Is that sort of contributing to the seasonality in deferred that's aligned with the larger deal flow?

Not really. Majority, by far, like almost all of the amount of the deferred revenues, is relating to update in maintenance and subscription for the software blades, so it's not...

In the software blade, not the subscription for the software. Yes, the software blade revenues.

Yes, the software blade, meaning it's not the appliances. The appliances, once they're delivered, they are recognized and that's just...

But still, I mean, the bigger portion of the appliance is in blades. I mean, when we sell an appliance, the appliance include in it several blades. And I think over time, we've seen a slightly higher percentage of the appliance price in the software blades, which means that it is going to the deferred revenue. So that's -- but it's not a very -- it's not a huge amount.

I guess that's what I was getting at though. The 21 -- or the 13 -- the higher-end series, the blade revenue allocation on those sales is slightly higher than maybe the lower-end boxes and that is helping the deferred revenue here in the -- with the large deal metrics in Q4.

Theoretically, that is right. Remember, it's like a, I don't know, probably between 10% to 15% of the appliance value, right? So some quarters can be 12%, some quarters can be 4% -- 14%. And you're right, it's based on -- depends which appliance is pulled more. So it can change every quarter.

The next question is coming from the line of Daniel Ives with FBR Capital Markets. Daniel H. Ives - FBR Capital Markets & Co., Research Division: So you have a few resurgence of growth here. How much do you think is related to product cycle, maybe channel execution versus secular just in terms of strong security growth? That's my first question.

I don't know how to answer it. I think we've had a good pipeline into -- in the fourth quarter. A lot of it was generated throughout the year. And I think we've outperformed even our own pipeline in the fourth quarter. I don't think that there was anything too cyclical around that. I think it may be things that are going -- that are more big year and back-end loaded. I think it may be just, I think, good competitive wins. I think from -- if you look from the -- during the quarter, we had both examples, but I don't know how to measure it. Daniel H. Ives - FBR Capital Markets & Co., Research Division: Okay. And then in terms of M&A, is there more of a sense now that you'd be willing to maybe pay out for an acquisition? Obviously, you've been very disciplined from a valuation perspective. But in terms of M&A, is there a little bit of different mindset going into 2014, just given that now growth looks pretty consistent in terms of the core business and you guys, obviously, have more cash in some countries?

I think in the M&A perspective, we are looking for the right opportunity. I think clearly the valuations are not low. But the main thing is something that will give us either a great technology that we really want or a nice growth that will complement our portfolio. I think what we've learned throughout the year is that we need to find very good synergy with our customers and with our product line, and just acquiring technology because it's good or because it carries a nice revenue but without the real synergies doesn't work for us. But again, we are looking in a wide range and we may surprise ourselves. Not that I expect that, but I'm looking it in a very open way. Not that we are a -- that we have any complicated formula, but nothing fixed.

The next question is coming from the line of Brad Zelnick with Macquarie.

Gil, how do you think about your need to be on the endpoint, especially in light of FireEye buying Mandiant. Does that change your thinking at all?

I don't think that changes much. I think we're actually looking today on the endpoint, and I think we want to take different approaches to the endpoint. I think the endpoint per se market of the -- and the huge market, there are 90-some percent of the market is the antivirus. That's a different market and I think our focus shouldn't be on that. I think we have other ideas on what we can do on endpoint. It can be small agents that connect to our cloud service, which is something we are starting to launch with veil [ph], a very soft launch, but that's something that we're starting to do. It can be -- so I mean, my direction would be looking more at the data security side, on lightweight agents and to provide more security to endpoint through the cloud, which is the general direction that I look -- as I look at endpoint.

And just a quick follow-up for Tal. You might have mentioned this already and I might have missed it. But the cash payments to the Israeli Tax Authority in the press release, you talked about there being a follow-on payment in Q1. Just for our models, can you tell us how much that -- you expect that will be?

Slightly over $100 million.

The next question is coming from the line of Keith Weiss with Morgan Stanley.

Following on some of those large deal metrics with 72% of revenues from deals over 50k and the good deals metrics on deals over $1 million, can we take that to more broadly talk about increasing ASPs across the board? Or was that just more of a barbell effect with large deals?

I believe, Tal can correct me because she knows better the number, what I've seen is the slight increase in ASP, not a big increase in ASP. But we do see larger deals between the more products per deal and more products per customer.

Yes, I would just add that remember that the software blade initiative that started in 2009 is very successful, which means existing customers are purchasing more products from us. So the total cost of a transaction with a customer increased. So while ASP can stay the same or slightly increase or slightly decrease, this depends on which appliance they chose, whatever software blade they put on the bucket, the material parts of the ASP of the long term of the customer. So you see software blade is very successful. It's already 25% of our update and maintenance and subscription lines. 25% is quite a lot, it's 1/4, which means it's a very successful. Therefore, the deals for the customer as a whole is increasing.

So software blades are increasing ASPs, but slight increasing ASPs?

Total ASPs. It's the size of the transaction we are having with the customer.

It's not how we measure it. The ASP, we usually measure on the first-time buy around the cost of the appliance. Remember, we had a year that it was going down actually. This year, it went up, so that's a good thing. On top of that, the following year, the customer is going to buy more subscription and more for the software blades, more software blades, to renew the software blade or just buy brand new software blades. So the total customer value is going up. And I think at the end of the day, if we look at how many dollars the customer has spent with us 3 years ago versus now, the numbers clearly went up and maybe even went up significantly as a result of the software blades.

Got it, excellent. And then I was wondering maybe you could talk a little bit more broadly about the competitive environment, the change that we saw in 2013 and how you're thinking about it in 2014. As there was some significant M&A in the space with Cisco buying Sourcefire, like a previous caller says you saw FireEye buying Mandiant, FireEye has definitely come up in a lot more conversations and has been seeing some pretty good growth. How do think of the competitive environment going into 2014? Do you see this significantly changed?

I don't know if it changed. I think, clearly, 2013 was interesting, in fact I haven't seen personally a lot of changes as it relates to us. I think the FireEye, not just the FireEye acquisition, but the FireEye IPO clearly shows that there's a lot of potential in fighting threats. We see some of that and you can see some of that in our software blades line. The software blade, big, huge portion of it, the majority portion, I think, is fighting new types of threats, and it's bigger than the FireEye business. Now FireEye clearly demonstrates that even in niche markets of the subsegments, there's a big potential. And I think we need to show to the market that we have very good technologies in that space, and we do. I mean, we came up with that in the middle of the year. And I think the competitive benchmarks that we have are showing amazing results. Once we publish that in the coming week, I'll be happy to share it and I think very, very good signs for us. We still have a lot of work and I don't think it's trivial to market it to our customers, then that's a challenge we always have.

Excellent. If I could sneak one last one. As part of -- it sounds like you're talking a lot about investments on this call probably a little bit more so than what we've heard on prior calls. Is part of that, like you're saying, do you guys have really good technology in-house that competes with some of the more louder names in this space, let's say, and you're looking to market a little bit more aggressively in the year ahead?

Absolutely. I think it's a correct assessment.

The next question is coming from the line of Matt Hedberg with RBC Capital Markets.

In terms of Application Control, it sounds like it was an important component of 4Q components. And I guess, with the largest application library in the industry and competitive price points, is there a way to think about how penetrated your installed base is with Application Control?

It's actually quite early both. I think the #1 blade in terms of penetration is IPS and then Application Control and then a lot of them with similar sizes like antivirus, anti-spam, URL filtering and so on. But it's still a -- I mean, out of our installed base, it's probably in the low tens of percentage, right? So there's still a huge potential there.

That's great. And then as a follow-up, identity theft has been, obviously, all over the headlines recently, and Gil, in the prepared remarks, you talked about that and mobility as a key focus for Check Point. I guess, in your minds, why are all these breaches taking place? Is it really, as an industry, is it a technology issue, a security management issue? And are you seeing increased demand based on these breaches in the breadth of your portfolio?

First, I think the recent attack, which we've seen, are very sophisticated attacks. Well, for example, usually traditionally you might say an enterprise should protect its database or its data center. The last huge attack that we've seen on the U.S. and I won't name names here, but it didn't happen on the main databases. It happened on the -- on POS machines in branch offices, which actually strengthened the need to -- for a company to have a unified and a global strategy for its security and not just point products or even good technologies that's protecting its headquarters. I think what we're seeing from the hacker's perspective is clearly smarter hackers doing sophisticated attacks. This is not just a small Trojan horse or a worm that screams I'm here and cause some damage. This is a multistage attack with a collection of data, with infiltration of system, with taking data back and so on. And I think there are good answers to that. But I think it takes customers -- let's put it that way, it takes our industry more time than we'd like to provide a technological solution, but it's probably taking our customers much more time to deploy the technology or require the technology than we would like. Unfortunately, what I see is that for customers to deploy a new technology, it takes between 1 year to 3 years. And I think the hackers don't really give us the leeway. They don't wait for 1 year to 3 years until they use the new attacks. They are developing new attacks every day.

The next question is coming from the line of Rob Owens with Pacific Crest.

Tal, you talked about a $5 million hit in 2014 due to FX. Can you remind us what the impact was in 2013?

I think it was slightly less, a few millions of dollars. Remember that we had a hedge also last year so the net effect was slightly less, probably $2 million, $3 million. And for next year, obviously, we're going to -- we will probably going to hedge next year like 2014 as well, but the hedge is already from a low number. So based on the current rates, it's around $5 million effect. It's net effect. On the Israeli shekel, it was significantly more. But some other currencies reduced it slightly, so the net is around $5 million, $6 million.

And I would add one thing, Tal can do the calculation, but unfortunately, the effect so far is cumulative. So basically, if I look at the effect on the last 2 or 3 years, probably getting close to $0.10 a share just from the currency effect.

Sure. And then on the product revenue side, it's been flat for 2 years, I think, on an annual basis, but you're seeing some momentum with new products. How should we think about product revenue growth of 2014 in the context of, I think, about 6% growth at the midpoint of the range?

So we didn't provide a split, but I think for now a good assumption is an even split between the 2, between products and update and maintenance.

And remember, one thing that we have done maybe a bad service to ourselves and confused, even ourselves, with some of the accounting rules, the fact that many of our new products come in the form of a software blade and they are listed under the services line in the P&L. That's something that's accounting, and that's something that -- I mean, in reality, we are selling more technology, more new technology as part of our product and not all the credit goes to the product line.

Sure. And the blades were impressive, I think, at 28%. But if I back that out, can you help me understand why the services growth is roughly flat to up 1% year-over-year, the service and maintenance component?

For the reason that you mentioned, product was flat. And if the product, excluding software blades, is not growing, which is what happened in the last 1.5 years, then you don't get a new subscription. And if you don't get a new subscription, also the update and maintenance is flat.

The next question is coming from the line of Tal Liani with Bank of America Merrill Lynch.

Most of my questions were asked. I just want to ask you about dividends and the potential for dividends going forward.

I think we are very open to the subject. And you see that we are increasing our buyback program to the old issue of shareholder return. I think from serving our shareholders, you guys and basically the vast majority of investors would like a share buyback and that's why we are increasing the share buyback. Personally, by the way, I'm very open to dividends and I'm really reflecting here the perspective, not of myself, but of the feedback we are getting from our large shareholder.

Yes.

The second question is about the bookings. I just -- I'm trying to understand bookings were up very nicely the last 2 quarters. Revenues are kind of climbing behind. Is -- when you look at the composition of bookings, is it a lot about the services that will be recognized in a ratable way? Or should these bookings translate into just delayed recognitions of products and blades, et cetera? So that means the -- what you report is products should accelerate over time?

It's actually relating to the line of the update maintenance and subscription line. But bear in mind that, by the way, the reason why we don't disclose bookings is because remember, it can fluctuate between quarters. So one quarter, it can be very high, and another quarter, it can slightly lower. And none of them should create over panic or over excitement, right? The other quarters that the deferred didn't move and I told you it's okay because we got the booking a quarter before. I'm not saying that's the case now. We had a very strong quarter. You can see very clearly in the deferred. And you can see both the short-term and the long-term deferred revenues increase nicely. But booking can sometimes be timing. So I think your question, revenues from majority of the deferred revenues is going to the update, maintenance and subscription lines.

The next question is coming from the line of Karl Keirstead with Deutsche Bank.

Tal, a question for you. Last quarter, you indicated that the combination of product licenses and the annuity blades summed to about 8% growth. I liked that metric. If I calculate it for this quarter, it feels like it was about 9%. So I have 2 questions. First of all, do you think that, that high-single-digit growth for the combination of those 2 items can continue near term? And secondly, what's your latest thinking around breaking out the annuity blade lines so we can see it more clearly in the reported numbers?

So a, I'll start with the end, it's already going to be broken up in this 20-F. So next year is going to come broken already, that's one. In the 20-F, you have the breakdown, obviously, for the last few years. When it comes to that metric, I agree with you because it's relating to what Gil just said, that if we take the products, including the blades, which is, from our perspective, when we sell a product, we just sell it to the subscription, then the growth of the product is significantly higher than what you see in the P&L, absolutely. And you'll be able to see it from future reports.

You will be able to see the recognition in future reports for sure.

Yes.

The actual product sale may be even higher.

Yes.

The next question is coming from the line of Gray Powell with Wells Fargo.

I just wanted to make sure I understood the software blade commentary correctly. You said it grew 28% year-over-year. Was that Q4 or full year 2013? And then how should we think about the growth in software blades in 2014 within the context of guidance?

We didn't provide the breakdown, but it's probably going to decelerate slightly as it decelerates every year since you have a lot of renewals coming from past years. The 28% was relating to Q4 versus Q4. Yes...

The rate was quietly accelerated in the fourth quarter compared to the previous 3 quarters.

Yes. So it was 28% Q4 versus Q4. And I think we covered your question.

All right. And then just one more, if I may. You mentioned endpoint and cloud services. I mean, should we expect you to introduce more of an anti-malware solution into your endpoint product set at some point?

I wouldn't like to call it that way, but yes, we will have more anti-malware capabilities on our endpoint. And some of it may be carried through cloud services and not all through like a big, heavy client.

The next question is coming from the line of Phil Winslow with Crédit Suisse. Philip Winslow - Crédit Suisse AG, Research Division: Most of my questions have been answered, but I just want to touch on geography. Obviously, you guys saw stable growth here in the U.S. and then, obviously, you were there by some deterioration in APAC. Gil, when you look forward at your pipeline for Q1 or for 2014, wondered if you could just give us your comments about what you're seeing geographically and sort of just what your expectations are.

I don't think I have something too much in particular. Last quarter, I think U.S. was great. Europe was also very good. Europe was even particularly strong on the product sales, which is the best sign. For 2014, I think our model for our sales force has been quite balanced between the different regions. Philip Winslow - Crédit Suisse AG, Research Division: Got it. And then also just, Gil, you made a comment on just remote office, branch office. Just wondered if you could comment about what you're seeing there. Obviously, you talked about your small and midsized business initiatives. But sort of in that robo market, what does Check Point have to offer there?

I think the new 600 Series that we have is an amazing product. And I think the review that came out when we introduced the product shows that the product is, hands down, winner in the category. I think there's much more potential for us to gain the mindshare of the resellers and the customers that are buying our solutions. But the 600 Series is an amazing solution. We have a scalable architecture, so you don't have to end up with that. You can also grow to the higher-end product. Again, some of our cloud services are a great complementary things to small and midsized businesses because they don't require one. Actually, when we see high-end businesses, they like to build their own private cloud and not to use external cloud for security analysis. The small business, they cannot afford putting expensive equipment, and our cloud services are a great solution for that. So I see a great potential to that. At the same time, it will take us a long time to build that pipeline and convert the channels from other offers to our appliances.

And I will just say that so far, since we launched the 600 and the 1100 in Q2, every quarter, Q2, Q3, Q4, we see tens of percentage of increase, both in the dollars and in the units.

Still, unfortunately, still small compared to the potential of that market.

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

Tal, just a quick question for you on cash available. I just wanted to confirm with these Israeli tax settlements out of the way, could you -- can you -- is all of your cash flow generated available to buy back? And is all of the $3.6 billion on the balance sheet available to return if, understanding you're not necessarily announcing that, but is -- are there any other restrictions on the cash?

I'll try to give the short answer. The new cash is free. The ones -- about $2 billion out of the rest of the balance is free. And the rest of it is free because it's not coming from profits, but actually from advances from customers, deferred revenue, equity and so on. So that is a reduction of capital and it's a legal process.

But it's about the other types of flows. But from the tax flows in Israel, now all of that is free.

Got it. And then just, Gil, a question for you. There's been, I think, some building excitement from some investors around the potential for a pickup in firewall, a refresh activity during 2014. I'm wondering what you see. You have one of the largest installed bases out there in terms of gateways. I'm wondering what you're modeling and sort of customer history tells you about what 2014 looks like in terms of firewall refresh?

I think some of our data also shows a lot of potential. I think we're not modeling a lot of threat because in previous years, we haven't seen that a lot of these potential refresh have necessarily translated in the same timing that it was expected. But a lot of the IP Series products, which we acquired from Nokia, it's a good time for them to refresh, for example.

The next question is coming from the line of Brent Thill with UBS.

Gil, I just wanted to follow up on Walter's question. When you talk about that refresh, if you saw the last refresh 4, 5 years back and if you have an average life of a firewall 3 to 5 years, why would you not see a refresh going into '14 given the time series of the life cycle plus the technology shifts and everyone else in the industry is talking about this? Why wouldn't you see that?

I would say the following: first, of course, we see refresh. We see every year. So if you assume that the life cycle for a customer is 5, 6, 7 years, theoretically, every year, you should see 15% to 20% theoretically over your installed base. Now in good economic years, sometimes there's acceleration, and in bad economic years, sometimes there's deceleration. So the question, do we see, of course, we see. A lot of our sales are refreshed. In terms of the exact number, then, a, it's very hard to know how long the customer will take. Some of them will choose 7 years, some of them will take only 3 years. Secondly, remember that we went into appliances only in a big way really when we acquired also Nokia, which is 2009. So we don't have the historical data when the customer purchased his latest appliance unless he purchased it from us and that's basically from 2009. So over the years, we have more and more data relating to the original data of the hardware appliance of the customer. So over time, we see more and more of that exact date that they purchased the appliance, not the software that is on it. So I think that's what Gil was relating to.

Okay. And Tal, can you just walk through last year? If you broke out your new customer growth versus existing customer growth, is there a metric or direction you can tell us in terms of how that new customer growth is tracking?

Yes. Remember, we are like dominant in the market. We are leaders in that, so we have hundreds of thousands of units installed out there. So the number is, obviously, for us, it's a fraction comparing to new customers that are just coming into the game. So for them, majority of their customers are new. But for us, the majority is existing customers. Software blade, a lot of these are new, not customers, but new products sold to existing customers and some of them also to new customers. We have thousands of new customers every year, right? But...

We have thousands of new customers every year and some of them are small, some of them are very large. We've seen deals north of million dollars that are new customers, even though usually for a new customer, it takes time to ramp up. Our strategy, by the way, is not to do huge deals at once. But most of our customers, we like to -- them to purchase and feel comfortable and do more. But we are seeing a nice increase in new customers.

All right. Thank you guys for joining us. Before I leave, I just want to make sure everybody got guidance correctly. For the year, it's $1.45 billion to $1.5 billion, and the non-GAAP earnings per share is $3.50 to $3.70 for the year, and GAAP EPS is expected to be approximately $0.32 less. On the quarter, we're expecting $330 million to $350 million with $0.79 to $0.86, with GAAP being $0.08 less. And with that, I'd like to say thank you for joining us today, and we look forward to seeing you guys through the quarter. Thanks.

Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.