Check Point Software Technologies Ltd. (CHKP) Q4 2014 Earnings Report, Transcript and Summary

Greetings. Welcome to the Check Point Software Technologies’ Fourth Quarter and Year End 2014 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. I would now like to turn the conference over to your host Kip E. Meintzer, Head of Global Investor Relations for Check Point. Thank you, Mr. Meintzer. You may now begin.

Thank you, Rob. I would 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 2014. Joining me today on the call are Gil Shwed, Founder, Chairman and CEO, along with our Chief Financial Officer, Tal Payne. As a reminder, this call is being webcast live on our website and is being recorded for replay. To access the live webcast and replay information, please visit the company’s website at checkpoint.com. For your convenience, the conference call replay will be available through February 5. 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 highlight the following. During the course of this presentation, Check Point representatives may make certain forward-looking statements. These 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 include, but are not limited to statements related to Check Point’s expectations regarding business, financial performance, customers and products, including its expectations for product introductions and enhancements in 2015; our expectations regarding expanded investments and hiring across the organization and effects on the introduction of new products and programs as well as the success of those products and programs; our expectations regarding capital expenditures in future periods as well as the shareholder repurchase program; and our expectations regarding our business and financial outlook, including our guidance for Q1 2015 and full year 2015. 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 are contained in Check Point’s earnings press release issued on January 29, 2015 which is available on our website. And other factors and risks including those discussed in Check Point’s Annual Report on Form 20-F for the year ended December 31, 2013, which is on file with the Securities and Exchange Commission. Check Point assumes no obligation to update information concerning its expectations or belief except as required by law. In our press release, which has been posted on our website, we present GAAP and non-GAAP results, along with reconciliation of such results, as well as the reasons for our presentation of non-GAAP information. With that, I would 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 will just say that I am a bit under the weather, so if you hear a cough in the middle of the call everything is fine, I am just a bit sick. So, I am very pleased to begin the review of this great quarter and an excellent year. This quarter we had good results which came in towards the top end of our guidance as we continue to demonstrate solid growth. Our revenues for the fourth quarter increased by 9% year-over-year, reaching $421 million, while our non-GAAP EPS increased by 10% to $1.07. Before I proceed further into the numbers, let me remind you that our fourth quarter of 2014 GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets and the related tax effects. 2013 GAAP financial results also include the impacts of the tax settlement with the Israeli tax authorities. 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 fourth quarter of 2014, our revenues reached $421 million, an increase of 9% compared to the same quarter in 2013. Total revenues from products and software blades grew by 10% year-over-year. We had continued success in our super high-end and datacenter appliances on the one hand, a nice double-digit growth in our small appliances, the 600 and the 1100. Our software blade continued to show strong growth of 20% and represents now over 17% of our total revenues. The main drivers were the Application Control, Anti-Bot, DLP, and our new Threat Emulation. Our software updates and maintenance revenues reached $186 million, representing 7% growth year-over-year. Deferred revenues as of December 31, 2014 were very strong at $784 million, an increase of $112 million or 17% over December last year. Sequentially, the deferred revenues increased by 19%. During the quarter, all geographic regions showed nice revenue growth. Revenue distribution by geography for the quarter was as follows: the Americas contributed 48% of revenue Europe contributed 38%, and Asia-Pacific, Japan and Middle East and Africa the rest. From a deal size perspective, we continue to see strength in our large deals. The number of customers with transactions over $1 million increased by 13% to 85 customers this quarter compared to 75 in the same period last year. Transactions greater than $50,000 accounted for 71% of total order value similar to last year. Our non-GAAP operating income for the fourth quarter was $247 million, an increase of 9% compared to last year. GAAP net income for the fourth quarter was $186 million or $0.98 per diluted share. As you recall, in fourth quarter of 2013, we reached a settlement with the Israeli tax authorities relating to trap profits in prior tax years. The settlement has a positive $15 million net effect on our GAAP P&L. Excluding this effect, our GAAP net income for the fourth quarter of 2014 increased by 4%. The effect was eliminated in our non-GAAP net income for the fourth quarter of 2013. Non-GAAP net income for the quarter was $203 million or $1.07 per diluted share, up from $192 million or $0.98 per diluted share in the same period a year ago. Non-GAAP earnings per share were at the top end of our guidance with 10% growth year-over-year. Our cash from operation increased this quarter to $210 million, net of all tax payments, including tax payments relating to the settlement. Our cash flow from operation increased by 4%. Collection continues to be strong. We continued implementing our share buyback program during the quarter and repurchased approximately 2.62 million shares for a total cost of $195 million. Now, let’s take a look at our 2014 fiscal year highlights. 2014 was a great year for us, with revenues and EPS coming in at the top end of our regional guidance for the year. Our revenues were $1.5 billion, an increase of 7% from last year. Non-GAAP EPS was $3.72, an increase of 8% compared to $3.43 last year. This year we have experienced an acceleration of our growth rate. Our products and software blades increased by 10%. Our growth in product came mainly from the super high-end and datacenter. Software blades continued to be significant driver of growth delivering over $265 million revenues, reflecting 22% growth and reaching 18% of our revenues. Software blade incorporates our new technologies, including the Application Control, Anti-Bot, Threat Emulation and Mobility Blades, which embody a significant future growth opportunity for us. For the year, cash flow from operations was $753 million. Excluding net tax payment, our cash flow from operation of 2014 increased by 5%. Cash balances reached $3.683 billion at the end of the year. In 2014, we purchased – we repurchased approximately 11.2 million shares for an aggregate amount of $765 million, which represent an average repurchase per quarter of $191 million. We believe that our market leadership and long-term growth prospect make this an attractive time to continue further utilizing our cash to increase shareholders’ value. As such, we have announced today an updated buyback plan effective immediately, to repurchase up to $250 million a quarter, a 25% increase compared to last year and up to an aggregated amount of $1.5 billion for the whole plan. The quarterly amounts may vary. Now let’s take a turn – turn the call to Gil for his thoughts on the fourth quarter and next year.

Thank you, Tal and good morning to all of you joining us on the call today. We concluded 2014 on a high note or should I say notes. We delivered revenues and non-GAAP EPS at the high end of our projection. Software blades continue to drive the growth this quarter when datacenter super high end as well as small business and branch office solution contributed to the overall strength of the quarter. The combined software products and blades revenue posted a double-digit performance with 10% growth. Software blades alone contributed 20% growth. The challenge of cyber security has also continued to grow in 2014. Attacks on one company in 2013 has evolved into multiple attacks on multiple companies in the same industry. As we have seen with attacks across the retail industry. Financial institutions continued to be a target of many major attacks. While major publicized attacks are growing, the reality is that everyone is experiencing threats and attacks. Studies show that 74% of organizations have detected at least one malware attack on their infrastructure. Mobile devices are also a major target for attack and are becoming the backdoor to the corporate network. New types of malware are being revealed. And this next generation malware is more sophisticated than previous generation. In many cases, this malware is more effective at hiding. It is fully morphing. So every instance of the malware looks differently. The new malware is often programmable and can be operated remotely. We have seen some high profile damage inflicted by this next-gen malware, yet the awareness of these new types of malware is still low. We have been focusing on addressing these new cyber security challenges, advanced threat and mobility. During the year we have demonstrated our innovation and commitments to these areas, resulted in InteliStore, our platform that allows organizations to receive intelligence on specific and focused security attacks relevant to them. Another demonstration of our capabilities in preventing cyber threats is the Miercom test performs on thin bookings or Threat Emulation technology. The test was completed utilizing unknown attacks that were run against four different vendor products. Our Threat Emulation product came in first with a 100% catch rate. This result was significantly ahead of the competition, which delivered disappointing catch rates of 70%, 62% and 27%. The disparities of these test results are not revealed, and this is only one of the ways we are addressing advanced threats today. Our security research team continues to analyze all kinds of cyber connected products in order to better secure the access to the Internet. This industry leading security group has identified several critical vulnerabilities in the last year from mobile operating systems and applications to security and infrastructure devices. Just last month we revealed the misfortune cookie security vulnerability in home routers and Internet modems. This vulnerability is one of the most widespread vulnerabilities found in recent years with more than 12 million devices identified and exposed with the fact from the Internet. Mobility is the second area of focus. As we look to make Android and iOS devices secure, last quarter we introduced the Check Point Capsule, a revolutionary solution to address the needs of mobile security, allowing enterprises of all sizes to secure their mobile traffic and create secure connection to the enterprise network. In addition, it provides a secure workforce on mobile devices and most importantly it is designed to provide end to end data security. All documents are encrypted when they are created, classified according to the relevant group and shared on all mobile and non-mobile devices securely. It sounds complicated, but we made it extremely simple, and in most cases it requires fewer interventions by the user. System is designed so the document is created, secure and remains secure without a single touch by the user. In the coming months, we will be expanding our already extensive platform with the introduction of R80. We have incorporated many new capabilities in the latest generation of our management platform. Several helping organizations consolidate the security infrastructure and manage it much more effectively. NSS Labs have already highlighted that Check Point Solution require half the administration hours than competing products. With the introduction of R80 unique capabilities we should be able to achieve greater efficiencies for our customers while providing better security and better consolidation of security solution. With 2014 behind us, we look forward to 2015. We believe heightened awareness of security in the market place is a great opportunity to further expand our industry footprint and capture leadership in these additional marketplaces. As a result, we intend to significantly increase our organizational investment, mainly for accelerated growth of our development, sales and marketing teams to capitalize on expanding security markets opportunity. We expect this will allow us to accelerate the introduction of new and innovative products to market as well as increase our coverage of partners and customers. This should thus enable to further drive the adoption of our industry leading solution. These investments will be front end loaded and we anticipate these investments will bear fruits towards the end of the year to early 2016. Our sales force is very excited with the expanded opportunities and with the increase in coverage. This brings me to the financial outlook. In all my regular caveats it is always hard to predict the future and there are many factors that could lead to outperformance or underperformance that must be taken into consideration. With that said, for 2015 we expect revenues in the range of $1.600 billion to $1.650 billion. Non-GAAP EPS is expected to be in the range of $3.90 to $4.02 based on an expected diluted share counts in the range of 184 million to 186 million fully diluted shares. GAAP EPS is expected to be approximately $0.35 less than that. For the first quarter, we expect revenues in the range of $360 million to $375 million and non-GAAP EPS in the range of $0.89 to $0.93. GAAP EPS is expected to be approximately $0.08 less. With that, I would like to thank you once again for joining us on the call today and open the call for your insightful questions.

Thank you. We will now be conduction question-and-answer session. [Operator Instructions] Our first question comes from the line of Walter Pritchard with Citigroup. Please proceed with your question

Hi. Thanks. Tal, first question, just looking at the numbers, it looks like you have reclassified or moved around some products and license revenue from a year ago, if I look at the December 2013 numbers, I am wondering what was behind that?

That was actually done in Q2 2014 when we split the software blades to a new line. So now we have products, software blades and updates and maintenance. The software blades that are classified as products were also classified to software blade.

Okay, got it. So the 156 reported a year ago is now 152 and the difference went into blades?

Exactly. Yes.

Okay.

In the blades it used to be products.

Perfect. And then, Gil, on R80 I mean we have been hearing about it for three or four quarters from some of your partners and so forth. Can you talk about – I know you have generally said in the past that a new release like this doesn’t have any immediate revenue impact, but can you talk about what you are trying to accomplish with the release and as we look out maybe not the next couple of quarters, but over a longer period of time what will this enable you to do or where can you get revenue that you haven’t gotten revenue from in the past with R80?

I think R80 can lead to many things. One, I mean first and foremost we are doing it for our customers that they can continue – I mean our management platform has been characterized for many, many years ahead of the competition. And I think this one we are taking another leap forward, we are not resting on our laurels, but we are pushing it forward even further. And I think that’s very, very important. Now I think it’s important to make customers life easier, I mean, with many, many capabilities, whether it’s multiple administrators, whether it’s faster times to make changes, whether it’s the size of the databases and the number of tools and objects we can store which can grow at 1,000 times more by utilizing new storage technologies and new database technologies. And the most important element is actually the security consolidation. It helps customers to get better security with much better capabilities to consolidate the management of multiple functionalities and multiple software blades from one rule base or one policy when everything is incorporated together and the effects are very, very clear. So, this is another element. Now, where can it help us financially? I think winning the more customers and winning the confidence of existing customers is always important. I believe that they have very good possibility of seeing some refresh cycle in management platforms. We have the Smart-1 management platform and that can be helpful. But I have done – but I look at it as part of our overall product growth and I think the excitement around customers and partners is a very positive thing and hopefully it will lead us in the right direction.

Great. Thank you.

Our next question is from the line of Phil Winslow with Credit Suisse. Please proceed with your question.

Thanks guys and congrats on a good quarter. And just to follow-up Walter’s point, if you kind of kind of apples-to-apples the historical, it looks like you guys grew product revenue 5.9% whereas consensus was still using the old breakdown so that was at 4.7%, so you had upside of billings and better product growth. So, that’s a really impressive quarter. My question is twofold here. One, just on blade attachment, obviously with the deferred outperformance, I am assuming you are seeing an improvement in blade attachment. I wonder if you could also just comment on renewal rates. And then second question just as far as the OpEx goes for 2015, I wonder if you could give just more granularity on sort of where those investments are, are going into just some more color would be great? Thanks.

Okay. I am sorry I forgot the first question.

Blade attachment and blade renewal?

Yes, sorry. So, stating the same numbers we have seen for the last year, renewal of the bundled was around 40% and renewal of the unbundled was around 70%. So, it remains to be very strong. This quarter, we saw a nice growth both in the DLP compliance, Anti-Bot and Threat Emulation, which is many of them are part of our new blade, which was very nice to see. And the renewal rates pretty much stayed the same. And the second one was relating to the OpEx expenses for about next year.

So, I think when we looked into what should we do in 2015 and what should we do differently? One option that we had was to continue with our regular expansion, which I think in the last few years produced great results and kept our margin at the industry record and allowed us to grow nicely. But I think what we have seen is that we are not capturing the full opportunity of the market. We have the new solutions for mobility and threat prevention that requires us to make several investments in introducing them and focus on them. We think that we can serve more customers. We think that existing partners and customers can get to a much more attention. And all of that can lead at the end to a higher growth rate that we have. So, based on that, we decided to accelerate our investment in these groups in addition to even more expansion in the development team and add many more people that will help us feed the new markets and expand and better serve customers and partners on the existing markets that we serve. And I think based on that we decided to accelerate our hiring plan significantly – and significantly means by hundreds of people around the world over the basic plan, over the organic growth. Our aim in that is double-digit growth in the revenues. And I think this will take us a little bit of time to achieve that. I mean, if we hire a salesperson now, we should expect some early results towards the end of the year and most of the results in 2016. Recruiting new customers, let’s say, starting with a new area like mobility, we will start by winning many – or my goal at least is winning many, many customers and then expanding some of these customers to be major deals that contribute a lot of revenue. So, these are few examples about what we think we can do. And the overall goal is to get to this year end and beginning of next year with a higher growth rate than we are used to in the last 2 or 3 years.

Got it. Thanks guys.

Our next question is from the line of Brad Zelnick with Jefferies. Please go ahead with your question.

Thanks very much and I will echo Phil’s compliments on a great quarter and a great year. I have got two questions, first one for Gil and then one for Tal. For Gil, Gil, I think most of us appreciate the strength and flexibility of your architecture and why you benefit as customers simplify their security environments? But perhaps you can talk what evidence do you see of solution consolidation? Specifically, do you see customers bringing more capabilities on to a single platform versus integrating point products as they have done in the past? And then just a tactical question for you, Tal, on software updates and support, it seemed to be much stronger than we have seen before. Is that just in anticipation of the R80 release and customers getting current on support or is there anything else driving that? Thank you.

So, I think we are seeing more proliferation and more security solutions, but we have seen great evidence in the past of what happens when consolidation works and when it works right. I will give you one example that’s already a few years old and the example of IPS. IPS started as an IVS industry many years ago then evolved into standalone IPS products with some good solutions that achieve the nice numbers, but reached relatively small number of customers. We introduced our integrated IPS few years ago and once this product got to the right maturity and the right quality, we are seeing now that the whole IPS industry has changed. Standalone IPS products and standalone IPS companies are almost nonexistent anymore. If you look at our adoption rate of IPS, the majority of gateways and the majority of customers are now using the IPS blade. It’s contributed to our growth very nicely. And you can see the software blade revenue, that’s not just IPS, but IPS is a big part of it and contributes a very nice number and a 9-digit number to our revenues just by the add-on IPS, not the addition that it has to the gateway itself, which is a greater example of where consolidation actually works. And I think in many technologies you start at the beginning with some or not some, many competitive vendors trying to prove themselves reaching small numbers of customers, sometimes doing good job, sometimes doing not such a good job, that varies. It’s not always that the new vendors are producing amazing results, sometimes they do, sometimes they don’t, but to reach mainstream, it’s very, very rare, that’s where the new platform created. And I think that’s – I gave you one example or two more examples of that. And I think we are looking to do just that in several new areas. One of them is Threat Emulation that I think has a huge potential and I think we are starting to show the quality of our solution and it’s not just the quality, quality, the speed, I mean, I gave an example of the 100% catch rate. Our IPS solution is also the one solution that blocks all the attacks before the original networks. Some competing products let the attacks through and gives you half an hour later an indication that something wrong happened and starts blocking it hour later, a day later. I mean, you can look at the competition and see what they are doing. This is embarrassing. It’s horrible as a security person to see that we will let things penetrate to our network when we should be able to block it. So, I think this is a great potential for consolidation. It will take some time and that by the way additional people in the field that can give customers that feel of what does it mean and how does it work and focus on these kinds of solutions will help us further show the customers the value of the solution itself and even the value of the consolidation, which is much, much higher. Because remember, if you have 50 gateways on your network or 20 gateways on your network, getting our Threat Emulation on your network is fairly easy. Every one of these gateways becomes a gateway that enforces the threat emulation and sends these files to be checked. If you have to build another solution, the cost is millions of dollars, it’s almost impossible to go – to get everywhere, it’s not scalable and that simply won’t happen. So we are seeing – and by the way we have seen that some of these limitations with other vendors have in major attacks when the datacenter of the company was protected, but the penetration happened through the branch offices. And there has been a few famous attacks with that. To do this we are – we think that we need additional investment, because I think we have the technology, we have the product and we need to greatly increase our awareness and investment in the specific customer scenarios in cellular marketing.

Great.

Next caller, please.

Sorry, so your question was about the update and maintenance. So remember, Q4 is typically significantly more because we have a – that’s the largest quarter for booking that relates to update and maintenance. You have professional services many times attached to it installation, the cycle of management and so on. So I would say, it’s increased, it’s not a typical growth rate. You can see 7% is higher than the usual. But definitely the trend that it is increasing is relating to the strength that we see in the product therefore you have attach rate which is better on the update and maintenance. So we saw an increase throughout the year. Q4 is obviously a bit higher than usual as typically in Q4 in many years as a result of also professional services and other services.

Thank you.

Our next question is from the line of Daniel Ives with FBR. Please go ahead with your question.

Yes. Thanks. Gil, how would you compare what we are seeing in the space just over on cyber security spending relative to your span of being in the industry for so many decades in terms of hyper-growth, secular, is this once in a multi-decade type of growth that you have seen?

We don’t see the hyper growth in investment of a company. I think companies are still tight on budget and while many of them say that they want to invest in better cyber security, their overall investment in this area is may be slightly higher than other areas, but most hugely higher than they do in other areas. What we are seeing that when the right solution is presented to them, companies are willing to put the check and spend the right amount on the right project. Remember, at the end of the day IP security is still a very small part of the IP budgets overall. And I think that’s the big challenge when we are talking, I mean, here there are two challenges. One challenge is with the high end customers that are willing to do big projects and are willing to pay millions of dollars or hundreds of thousands of dollars for new capabilities or better architecture and so on. They require a lot of attention in crafting the right solution, demonstrating it, doing the right pilots and so on. And they require the more headcount between these two. But there is another opportunity which is in the mid-markets. There the customers are less knowledgeable. They won’t spend 6 months to evaluate technologies and so on. And there they even more need the consolidation, because there they get the awareness that they can now get a new gateway that will also do threat emulation and that’s an industry norm and they can rely on, it will do it. But if not, there is an IT guy, there is one IT manager in a company of say 1,000 employees that makes the decision is not necessarily an expert in security. So if he doesn’t – if he is not very well aware and very well educated he will skip that. And if he is well aware and educated then our strategy is very much good for, it’s very much for him because he can simply add the blades and get the additional capabilities. We are spread around all these sectors. We serve mid-size customers, we serve very large customers and we serve all the other customers sizes. And we must make the investment to win all these opportunities. And I think we do realize that the opportunity is bigger and we can do more to win that and to get customers to utilize better technology and get better security.

And just a quick follow-up, just given the sort of a new frontier and investments and given the opportunity, is there a change in terms of how you view acquisitions. Obviously, rather you are going to do organic, but in terms of bolt-on acquisitions and obviously valuation discipline, but can you maybe just speak to your view going into ‘15 from an M&A perspective?

I think where we have been serious about looking at the right acquisitions in the past and we are the future, I think we will look for the best technologies that can be incorporated into our platform. My main focus remains on making this platform a better platform not on buying revenues for the sake of buying revenues. That may be good for a short period of time but actually makes life more difficult in the long-term. I think what I am looking is things that can be incorporated into our architecture that can give the benefit to large number of customers and, of course, having the best technology. There aren’t too many of those that have large installed bases, but there are a few of these technologies that can be incorporated and are great additions and can make our technology even more differentiation in our market segments.

Thanks.

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

Hey, guys. Granted the footnote is always on being difficult to predict the future, but with the EPS guidance, it looks like margins go down a couple of points in the ’15, how do you feel about margins longer-term and whether or not that’s kind of a temporary phenomenon we should be back to operating leverage after ‘15?

I have been quite actually consistent about that for the last 19 years since we are public almost that our focus is not on the gross margin, our focus is on growing and growing in a healthy way and in a proximal way and serving the customers. I think having said that, we have been expanding our margin over these 19 years even though we started with very high margins in 1996. And I think that remains the focus for next year. I mean with the operating margins of 58% or 55% or 53%, in all cases we will have tripled the margins than our industry, our best competitors from the industry. Most competitors in the industry are actually highly profitable. And I think our focus remains where is the right investment. And when I look at what we should do next year, my main focus is, are we doing the right thing and are we doing it in a healthy and profitable way. And I think all the investments that we make today are pointing to that direction making healthy investments, making investments that in the near future we will be profitable. Where we will end up in a gross margin of 50% or 58%, I think we can analyze it further, but that’s not the main priority. The main priority is to keep the growth and keep the opportunity on our side.

And then sort of a different subject, but I think you listed Threat Emulation as one of the blades that was driving growth, I can’t recall if you had called it out in prior quarters. But was there an inflexion or an acceleration of adoption from Threat Emulation that was material this quarter?

There is definitely was an acceleration and very high growth in Threat Emulation, but it’s still very small compared to the other blades. I think what we are seeing with the blades that are a year or two years old or three – two to three years old, we are seeing a very large adoption and very high renewal rates. And I think that’s very, very good. In the beginning we had – we have seen big contribution to blades or blades that were bundled with the product. Today we see the high growth from blades as the unbundled blade as customers choose to buy new blades on top of existing infrastructure or customers that choose to renew their blade, invest most of their money to the growth of the blade. When you bundle things together you can easily shift things from one place to another. The execution or the reality is seen only 2 or 3 years later when you actually see whether a customer is actually using it, and whether they are willing to pay for it. And right now we have terrific answers to that question, because customers are showing us on the second and third and fourth year that they are using the technologies and that they are willing – more than willing to pay for them and that’s great.

And maybe just Michael, just – if I can just – the growth in percentage was very nice in DLP, in Threat Emulation, in the compliance blade that started to pickup very nicely and the Anti-Bot. In dollars, still Application Control is one of the largest, IPS is the largest. That’s the top two. Okay?

Thank you. Thanks, Tal. Thanks, Gil.

Our next question comes from the line of Aaron Schwartz, Macquarie. Please go ahead with your question.

Hi, thank you very much. I know historically you have spoken quite a bit about how large your installed base is and the focus really on serving that installed base properly. It sounds like some of your commentary here with your investments is more so in capturing new customers. I was just wondering sort of what has changed there to maybe modestly shift the focus to new customer acquisition? It seems like a little bit of a change in tone from the way you have spoken historically.

I think our focus was on both and remains on both. On one hand, we always try to grow the installed base and add customers. And we have been adding north of the 1,000 new customers every quarter consistently in the last few years. On the other hand, the biggest dollar amounts that we get in growth, is winning new projects and more projects with customers. And remember, we have very large installed base, close to a 100% of the Fortune 100 customers, a huge percentage of the Fortune 500 and many, many other companies. So, on one hand, the ones that are not customers we should add them to our customers’ list. On the other hand, it’s not just enough that someone is a customer. We should make all of these customers using our technology everywhere. We should make them use all our technologies and we can do better on this. I mean, we have been those customers that have been extremely loyal customers, that love us that think that we are their standard and yet not using some of our blades and we can make them consolidate their infrastructure with us. There have been projects and still when I talked about mobility as an example, that’s very much related to what we do, but in most customers it’s different people, different projects that we haven’t been addressing at all. And that’s a great opportunity to consolidate that and give a better solution. I mean, we are looking at both whether consolidation makes sense, but also in being the best solution. And when you look at our Capsule, it’s a much better product to use than any other product in the marketplace. It’s simpler, it’s clearer, it’s faster, it provides much more security, it provides more security capabilities, so there is no reason for us not to push forward for us and try to win this project as well.

Great. And second question if I could and looking at the guidance for Q1 and the year, it does seem like there is little bit of a revenue uptick in the second half. How much of that is from some of the investments you have talked about or would any productivity from these investments to be the upside your plan? Thanks.

The uptick in the second half is relating, that’s the beginning of the fourth we hope to see already from the recruitment that we have – most of the recruitments are Q1 and Q2. So, you see the most effect on the expenses in the first half and in Q3. The revenues will start to increase towards the end of the year. That’s the plan at least.

Next caller?

And the next caller is from the line of Gregg Moskowitz with Cowen & Company. Please go ahead with your question.

Okay, thank you very much. You executed well across the Board, but the performance in Europe was extremely strong. In fact, it looks like you saw around 25% sequential revenue growth in Europe and that’s more than we have seen in pretty long time and really tells a different story than the mixed backdrop that many saw foreign and tech companies are seeing. So, Gil, why are you doing so well in Europe and do you think healthy double-digit strength in Europe is sustainable in 2015?

I guess I will need to think about that. I have no good explanation for that except that we actually saw very, very good results in Europe in this past quarter. It varies between quarter but the last quarter was really good.

Yes.

Okay. And then a follow-up to Michael’s question, so as he pointed out, we are looking at a couple of points or so of margin hit, specifically just as a function of the investments. So, specifically, we are coming to around 55% or slightly less than that at the midpoint of the range. At the same time, the cycle has certainly been moving in your favor and based on current spot rates, just kind of wondering approximately what sort of benefit you expect to see to the OpEx or operating margins, just from FX specifically?

I think the strength of the shekel definitely can help us. It helps us mainly in growing the R&D spending.

But we took it into account in the guidance. I will say the following remember $1.06 already in Q4, so in Q4 we already saw the effect of – most of the effect of the dollar and this quarter you saw it, so it gave us about $0.02 in Q4. It can give us slightly more, but we took it into account in the guidance. The reduction that you see if you already build the model in the operating margin is mainly because we increased significantly our headcount. So, the guidance is netting the two effects.

And remember recruiting people in sales around the world that the shekel doesn’t help us. And also remember that when we intend to hire many developers and many sales and marketing people, sales and marketing people around the world are much more expensive than R&D people in Israel.

Yes.

Right, okay. And if I can just ask one other question, so Gil, you haven’t talked that much about the small business market recently and it sounds like it did quite well this quarter. I am just wondering if there was anything in particular that might have driven stronger growth for Check Point with small businesses in the Q4?

I think we have launched year and a half ago a new product line. And since it was launched like 5 or 6 quarters, it’s producing great results and great growth. And we are trying to capitalize more on that market and build more focused sales and marketing group, but we haven’t done that yet. So, I think that’s still ahead of us. Now, we have been doing few trials. And so far we haven’t seen – we haven’t found the right person or the sweet spot, but we are still seeing growth, which is great without that investment. Growing the small business sales team or a dedicated team for small business is still on our goal list and we have a new leader for that. And we intend to make that a reality too. So hopefully, if we will execute right, it’s not the end of the growth for a small business, it’s just the beginning.

Terrific. Thanks very much.

Our next question comes from the line of Karl Keirstead of Deutsche Bank. Please go ahead with your question.

Thanks. Tal, a question on operating cash flow, I think you mentioned that if we adjust for all the tax refunds and payments that operating cash flow was up 5% in 2014, that’s a little bit less than your adjusted earnings growth. Do you think that relationship between operating cash flow growth and adjusted EPS growth will hold in 2015 or are there any factors that might change that ratio to flag for us? Thank you.

Yes. So, actually we didn’t want to make the explanation too complicated, but it increased more. We had the hedge expenses relating to the fact that we hedge our balance sheet if you recall. So, when the shekel, for example, is getting stronger, it’s good for the P&L, but from the cash flow perspective, we have to pay for the balance sheet effect, right, because we have more liabilities in the balance sheet. So, that effect if I would have excluded, then the cash flow would have increased more than the 5%. I just didn’t want to give you a very long and complicated explanation, which I just did. But I say there should be a very strong correlation between the growth, the net income growth and the cash flow growth.

Okay, that’s helpful. Thanks, Tal.

And I am reminding you the last quarter we talked about the fact that we are going to invest in the building – the building in the headquarter in Israel and I think we gave a budget there. So just bear that in mind regarding next year cash flow.

And we have just put the crane today, so.

Yes.

My office will be – run out real soon.

Thanks. Our next question is from the line of Sterling Auty with JPMorgan. Please go ahead with your question.

Hi. This is actually Ken Talanian in for Sterling. Just wanted to touch back on the support and maintenance line, it looks like you saw some strength there. I was wondering if there was any change in pricing to either maintenance or support? And related to that I was also wondering if the mix was different from prior quarters in terms of the split between maintenance and support services?

No. It’s as I said Q4 sometimes can fluctuate slightly higher than the average as a result of end of the year project installation, professional services and so on.

Okay.

That’s all where I think the strength will be.

Okay. And then the other thing is I was looking at the gross margin came down a little bit for that line item, just wondering why that might be?

Nothing that I can think about, nothing specific, everything was pretty much in line. Obviously, gross margin can move a bit up or a bit down.

Okay. Thanks very much.

Thank you. Our next question comes from the line of Robert Breza with Sterne, Agee. Please go ahead with your question.

Hi. Thanks for fitting me in. Gil, you talked about the accelerated investments, I was wondering if you could speak to that may be a little bit more granularly relative to the geographical breakdown, do you see yourself investing more on the European side, obviously great growth this quarter. If you can just kind of help us to understand the investments by geography that will be great?

All of the geographies, there were three main geographies between Europe, America, and Asia will be growing quite consistently across all of them. We gave our leaders there, our leaders in each geography the task to tell us how much – what headcount they need and what they can contribute to our growth in the future. And we basically gave them pretty much what they wanted. And I think we will look for them to produce great results in the future.

Okay. Thank you very much.

So I think that I mean – so we will be adding a nice number of people in Europe, in Americas and in Asia.

Okay.

And each one of them operate in the different mix, different profile. I mean the talks that we have and the challenges and mainly the opportunities that we have are slightly different in each one, in each area. Europe and Asia tend to be more different countries how to conquer and how to improve in these countries. The U.S. tends to focus more on the customers and other markets and specific market segments being one big country and the flatter market and I think we will conquer often.

Thank you.

Thank you. We are nearing the end of our question-and-answer session. It’s time for one final question. And it will come from the line of Keith Weiss of Morgan Stanley. Please go ahead with your question.

Excellent. Thank you, guys for fitting me in just under the wire there. Just going back to the investments, in my model, it looks like total expenses are going to be up high-teens. And given sort of the strength that we are seeing in the security market, it definitely sort of makes sense to invest into it. But two questions there. It sounds like investments are going to be focused more on sales and marketing. I was wondering, if – one, if you can give us a sense of what type of expanded sales capacity you expect to see through this increased investment. And then, two, given Gil’s comment about you are not seeing sort of hyper growth across the board, if you can give us a little bit of specificity into particularly what areas do you think are sort of ripe for or where you guys can see increased opportunity or sort of where those particular opportunities are in a marketplace where you are going to be focusing on?

The key focus areas will be Threat Emulation and mobility. But I think that we also have a great opportunity in better supporting and integrating and working with existing customers, existing projects and mainly better working with our partners. So these are the three areas. I mean mobility, Threat Emulation and the existing partners and customers.

Got it, that’s helpful. And then in terms of sales capacity expansion?

In terms of...?

How much you expect your sales capacity to expand?

We didn’t provide those numbers. The idea is I think simple. We want to increase significantly the sales and marketing headcount in order to produce additional sales from all these additional opportunities, which is expected to happen towards the end of the year and more towards the beginning of next year, then 2016.

Got it. But you don’t want to quantify that increase in sales and marketing capacity?

We will be adding hundreds of people of sales and marketing as well as by the way couple of hundred people in development.

Got it, excellent. Thank you, guys.

Thank you.

Thank you, guys very much. And that concludes the call. If you would like to call back just let us know via e-mail or what have you. And we will look forward to talking to you guys throughout the quarter. Have a great day and we will talk to you soon. Bye-bye.