Check Point Software Technologies Ltd (CHKP) 2001 Q1 法說會逐字稿

Good morning everyone and welcome to the Checkpoint Software Technology First Quarter Conference Call 2001. Today's call is being recorded. For opening remarks and introduction, I would now turn the call the conference over to Ms. Janine Zanelli, Investor Relations. Please go ahead, ma'am.

Good morning and afternoon. I would like to welcome you to our First Quarter 2001 Financial Results Conference Call. As a reminder, this call is being webcast live from our website and a replay will be available through Tuesday, May 8 on the company's website at www.checkpoint.com/ir. If you would like to reach us after the call, please contact us in Israel at 972-3-611-5064 or the Industrial Relations Department in the US at 650-628-2050. These numbers will also be repeated at the end of the call. Here with us are Joe Schwebb, Chairman and CEO, Eyal Deshe, CFO, and Jerry Ungerman, Executive Vice President.

Before we start our presentation, I would like to read the following disclaimer. During the course of this call, the company will make forward-looking statements. Because such statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company's current expectations as discussed in our report on Form 20-F for the year ended December 31, 1999, which has been filed with the SEC. The company assumes no obligations to update information concerning its expectations. I would now like to turn the call over to Al Deshe, CFO to discuss the financial highlights for the quarter.

Thank you, Janine and hello everybody. Hopefully, you all had a chance to review the press release and financial results. I am pleased to discuss the financial highlights for the first quarter of 2001. Revenues for the quarter were $145 million, representing an increase of 86% over the $78.2 million recorded in the same period of last year. Net income for the quarter was $83.7 million, or $0.32 per share diluted. This represents an increase of 140% in net income and a 141% increase in earnings per share over the prior year. As you know, during the quarter we made a change to our business model and eliminated the third-party hardware components of our sales, or most of it. The results were $2 million less in revenues, but improved growth margin to 93% and no impact on the bottom line. Q1 operating income grew 154% year over year to $88.7 million, or 61% of revenues. Net profit margin was 58%. Deferred revenue continued to increase, reaching $123.4 million at the end of Q1, up 2% from $121.2 million at the end of last year and up $51 million from Q1 2000.

Now, let us look at some other key financial metrics for the quarter. Services and subscription revenues contributed $36.3 million, or 25% of revenues in the first quarter compared to $17.8 million, or 23% of revenues last year. Our DSO, day sales outstanding, for the quarter was 53 days, consistent with our expected range; a year ago DSO was 54 days. Headcount grew by 76 employees to 1137 at the end of the quarter as we continued to add R&D and sales headcount. And finally, cash and other interest bearing investment as of March 31, 2001 was $765 million compared to $656 million at the end of last year as the company continued to enjoy positive cash flow with an increase of $108.6 million this quarter alone. Well, this summarizes the financial results, and now I would like to turn the call over to Jerry to discuss this quarter.

Thank you, Eyal and hello, everyone. I would now like to share my perspective about some of the trends we have seen during the quarter. Geographically, the Americas contributed 46% of revenue, similar to last quarter, and this is a reflection of the challenging business environment in the US. Sales in the US were strong and contributed 36%, and Asia-Pacific was 18% with strong sales in Japan. Sales to service providers continued to be good and they represent today approximately 20% of our overall sale. Our installed base continued to grow this quarter with total customer installations now at 203,000, 90,000 of those VPN installations, and we now have over 72,000 customers. In addition, we began initial shipments of both our new small _____ of VPN1/Firewall 1 00:05:34 for small and medium businesses and the VPN accelerated tube card that provides in excess of 300 megabits per second VPN performance for under $1000.

We also made a number of announcements during the quarter that continue to focus on customers' everchanging Internet security needs, providing VPN and firewall solutions to large enterprises, small-to-medium businesses, or customers outsourcing their security to a managed service provider. To this end, we have begun to roll out the next major version of our flagship security software that will not only address customers' needs today, but well into the future. With the first of our next-generation announcements, we have once again raised the bar for user functionality with our new next-generation user interface. This innovative _____ 00:06:27 integrates security functions into a security dashboard, enabling a visual picture of security operations. This greatly simplifies the management of customers' increasingly complex security environments. In addition, we have also enhanced our management capabilities that offer new tools that enable next-generation management for easy, scalable deployment of globally dispersed Internet security systems. We also made available this quarter a groundbreaking new performance architecture that will enable a tenfold increase in VPN and Firewall performance to gigabit and beyond to meet the performance demands of future e-businesses. As part of Checkpoint's open, partner-based approach, we partnered with Dotcom, Intel, Nokia, Compaq, _____ 00:07:13, Rapid Stream, and others to deliver the new security acceleration product, which will include boards, servers, and security appliance solutions. We have also expanded our partnerships to provide our VPN1/Firewall1 solutions on leading appliances from a variety of manufacturers. The most recent was with Compaq, where we have jointly developed a Linux-based appliance integrating Compaq's Proliant servers with Checkpoint's VPN1/Firewall1 software. Additionally, we continue to execute our vision of providing Checkpoint solutions to new market segments. We advanced our broadband home solutions through a partnership with Ericsson, integrating _____ 00:08:00, a subsidiary of Checkpoint, _____ a home consumer firewall security software, and Ericsson cable modem. This partnership will enable both companies to provide an easily used out-of-the-box Internet security solution for the home. We also held our second annual US-based Checkpoint Experience, an internet security users and technical conference where over 1000 people of the industry's leading security experts and customers had access to in-depth information and demonstrations of our next-generation product family. The conference also featured over 20 customer presentations illustrating a wide variety of real-world applications.

Lastly, our products continue to win industry recognition from leading public relations. Our VPN1 product recently won Product Of The Year for VPN's Network Magazine and the ____________00:08:51 the security frameworks category of Network Computing's Well Connected Award. That concludes my comments, and I will now turn it over to Gil for further discussion.

Thanks Jerry, Eyal and Janine. We are very proud of our results in the first quarter. The market did acknowledge this quarter the fact that security has been and remains a critical piece of IT investment and high on the priority list for 2001. Having said that, it is also important to know the market conditions in the US IT market have changed and are presenting challenges for the entire industry, and Checkpoint is not an exception here. I also believe that during these times companies are looking for ways to use the Internet to reduce cost, and our VPN products present an exceptional solution for using the Internet in a dependable, fast and secure manner while cutting costs dramatically and achieving return on investment in a month or two.

During the quarter, I met with many of our partners and customers and saw a very healthy level of interest and demand for our products. So, while we believe we will need to work harder, we are working toward the original goals and would like to reiterate our objective of achieving 50% growth for this year. I want to thank you for your attention and open it up for questions.

Thank you. Today's question and answer session will be conducted electronically. If you do wish to ask a question, please press the * key followed by the digit 1 on your touchtone phone. We will come to you in the order-by-in signal. Again, if you wish to ask a question please press the * key followed by the digit 1 on your touchtone phone. We will pause for a moment to assemble our roster.

Todd Laker, CS First Boston

Hey, guys! How are you?

Fine, Todd.

Can you give us some insight into the Nokia channel? What percentage of revenue did it represent this quarter and how do you see the Nokia relationship changing now that the Compaq boxes are starting to ship?

The relationship will continue on. Nokia knows that we have a number of appliance partners. They feel very confident - and we do too - in their ability, the quality, the functions, the features...everybody is bringing some different value-add to the market through their channels to their customers, and we continue to do very well with Nokia as an appliance partner in the marketplace today.

As a percentage of sales, can you give us rough feel for what it constitutes?

Nokia, we did _____ 00:11:44 the change in the relationship and the way we work; so we shifted the lot of the revenues to the channel - actually we are planning to shift all of that, but not all of that happened in Q1. So Nokia direct revenues to Checkpoint were about 6.5% of our revenue. The Nokia platform was actually very high and gained market share against UNIX and Windows NT as a platform for deployment of products, about 20% right now _____ 00:12:15, so we will so this as very, very positive and are actually working now with Nokia on several major breakthroughs in Internet performance; just one we have announced after the quarter we have 500-megabit Nokia clients and there will be more coming.

Can you guys also give us insight into selling cycles and the end-market condition of VPN contrasted against the firewall? Is it one segment stronger or are they both receiving the same demand factors 00:12:48-49?

I believe that both the firewall and VPN remain pretty strong. The only observation that I can make is, I think, towards the end of the year. Right now, we are seeing a new sales cycle for VPN where people are focusing on the cost reduction element, which is a very positive move from the standpoint of generating the next step, next level of rose in VPN, maybe in the next year moving into the mainstream of IT and mainstream of networking, in terms of VPN. It also presents a longer sale cycles, because the bigger the project that we are involved - and these are bigger projects - the longer the sales cycle. So that is something to look for as well.

Could you guys give us some insight...the Israeli shekel was weak again this quarter. Can you quantify the impact on the operating margin and what are your expectations for operating margins, going forward?

The impact was actually negligible. A little positive, but very negligible. The Israeli shekel did not much compared to the dollar this quarter, and our plan and assumption are that the exchange rates are not going to change dramatically. So the impact would not be substantial any direction.

And in operating margin guidance, going forward?

More or less where we are now. As we said in the past, over the longer term, midterm Q3 or maybe full-year operating margin will probably come down a little bit, but for the short term we believe that we are where we are.

As a remainder to our audience, due to time constraints we would ask you please ask one question. Bob Lamb, Bear Stearns

Gentlemen, the US growth last quarter was probably the reason the growth rate is not as high as some expected. Can you comment on that? Also, are seeing that spreading to Europe and Japan?

Let me try and answer it. First, I think our growth rate for this quarter was exceptional, I mean we had 86% growth over last year in revenues, we are 140% in net income, we are on top of all our internal claims for revenues and ahead of them in terms of earnings, so we are very pleased with the results for this quarter and I think that was reflected very much in our guidance last quarter. I want to remind you that last quarter, on this conference call I said if you look at sequential growth please ignore the last $7 million of our revenue in Q4 because they were exceptional revenues which should not be built into our model. I think on any measure we performed very, very well this quarter in growth, both in revenues and in earnings. In terms of the market trend- and this is a different question - I think what we have seen is Europe is a very healthy market behaving according to our plan. In the US this quarter, we have seen some signs of weakness, _____ 00:15:59 revenue for this quarter in the US that you have seen in the revenue breakdown that Jerry gave. We are according to plan. So what we are seeing is we have to work harder to generate these revenues. This quarter we have seen no impact of that on the revenue side of the picture. Japan this quarter was very strong and we have seen one country that was weaker than what we expected, and that is Korea, but so insignificant that I do not think it should impact the model, going forward.

So, Gil, as you said in your comments, based on the _____ 00:16:37 you are still very comfortable with the 50% growth rates for the year on the top line?

Yes, that is what we said, I think. The market conditions are tougher and they should look 00:16:47 tough there: six months ago we said 50% was a very conservative estimate, and we still have six months to go. 50% may turn out to be conservative, but we think it is challenging and, if you remember, that was what we said last October. I think we are still saying the same thing, so I think our plan has not changed much. We do see that we need do work hard to achieve that, and that has not much from previous years. And we do acknowledge the fact that conditions in the market have changed in the last six months.

Thank you.

Steve Sigman, _____ Wessels

Nice quarter, guys. Jerry, can you talk just us a little more color on the US pipeline in terms of field sizes, what you are seeing there in terms of sales cycles, and then, if I could just ask a quick followup, you talked about growth rates and penetration levels. Just curious, what do you think the penetration levels are right now in terms of companies using VPNs?

I will take the last one first. We are still in the low double digits on penetration rates as measured by a lot of the different studies that we get involved in, our anecdotal data, and it still is primarily for intranet deployment - we still think there is a big opportunity for extranet as we continue down the road of VPN deployments, going forward. I talked about our user conference that we had in Nashville a month ago; there were 1000 people in attendance, so we have a lot of firsthand information as well as _____ 00:18:33 on people, but there is still an awful lot of activity. And then, as Gil said, VPNs are becoming even more important because of the cross trading associated with them, so we are finding a lot of demand, a lot of interest. A number of people did admit that, whereas a year ago they could sign off without telling anybody, now we are going to go in to get review and approval, which is taking a day or a couple of days or a week. But we do not see a tremendous elongation in the whole process, but it is a new step and, as Gil said, we are still pleased with our US numbers this quarter: they are just going strong as Europe or Japan relative to our internal plans.

Right, thanks very much.

Sure.

Kevin Wagner, Adam _____

Good quarter, gentlemen. I just had a question on the low-to-midrange portion of the business. How many partners have contracted thus far with you guys in that area and how many are currently shipping products?

You are talking about partners on the appliance side?

From the appliance side, that is correct.

Okay, well the two that are shipping right now are intrusion.com and Nokia through their ramp acquisition. Compaq announced that the first product they are bringing out is for the medium to large enterprises, they have not yet brought out their small appliance.

Mark Fernandez, Merrill Lynch

Thanks. Jerry, can you talk about any trends between your different channel partners, _____ 00:20:13 channel partners, especially in terms of deal sizes with these different channel partners?

Mark, not really. There is no visibility that I have into the breadth or depth by channel that says there are any changes in this quarter over another quarter. This is a very deep channel with distribution, resellers, and service providers and we saw just a continuation, as we have across all geographies, as we have previously discussed, so there is nothing different that I have noticed either in the numbers or anecdotal...

And Jerry, in terms of the Nokia channel is there a time lag in terms of how you are seeing the revenue or when you are seeing the revenue there?

There could be a little bit, Mark, in the fact that the customers may get the hardware before they give up the software through the distribution channel and there might be a little bit of a delay from when would get it previously from Nokia versus when we get it now through the resell on direct basis. So there might be some time element in there, but it will not be significant.

I would maybe add here that this time shift may be between two to six weeks in terms of shifting revenue and delay _____ 00:21:37 you get an order based on our relationship previously with Nokia.

But any impact in Q1 in particular, Jerry?

Just to the extent that a couple of weeks or more...it could have been; it is not easily visible from what we did because, as we said, we basically did what we thought we are going _____ 00:21:57 expected to do, so...

Okay, great. Thank you guys. Congratulations.

Sean/Shawn Jackson, Sun Trust Equities Sean/Shawn Jackson: Yeah. Good morning. A quick question to the general market question. You guys are implementing VPN. Is more of the business replacing the dedicated line or is it extending a secure communication line to branch offices where before they could not have that connection?

Up to now, I think it was the latter one, which is expanding communication, extending to a branch office where they could not afford to have a dedicated line before, and also replacing remote access for remote users who are working using the modem and now using the broadband cable modem/DSL modem. We are all starting to see the shift into replacing the existing line and upgrading them, and the data that we get locally from the customers is very interesting: we are getting 2-3 times more performance when they use the internet and they are cutting 50-60% of the cost. So that means that if you look at _____ 00:23:00 comparison, the cost cutting is 80% or higher if you adjust _____ 00:23:10 the same speed and the same level of service in the internet which used to be for the dedicated line. So we are starting to see now the shift in replacing dedicated branch office lines. Sean/Shawn Jackson: Thanks. Lastly the _____ 00:23:23 expense was a little higher than we expected. Is there anything significant in that?

Not much, not what you guys expected, but very well in line with ours. Sean/Shawn Jackson: Okay, thank you.

Thomas _____, _____ Montgomery

Hi! I wanted to know if you could give us a little bit of color on the smaller plant, the small office, VPN office, I know you said it is just starting. Do you have any numbers that you can share with us? And if I may follow up a little bit, you are saying 50% year-to-year growth. How, specifically, is this in the next quarter - shipping up in Europe in terms of weakness in the US or recouping in the US?

Let me try to answer the second part of the question and maybe Jerry then will answer the first part. In terms of the next quarter, I think Q1 behaved like last year. Q2 we think will behave like Q2 last year, but it is too early to tell right now what it will mean. The only thing we know right now is that the market conditions have changed and, looking at the past as a prediction of the future may work - it worked last quarter, it worked the quarter before - but it is also more risky than the confidence which you had in the past. So I would make any prediction right now for Q2. I think it can be a great quarter because we see a high level of activity, and again based on my customer _____ 00:25:12 meeting there is a lot of interest, but at the same time I think the amount of confidence that all of us have in the market, at least the US market and maybe other markets in the world there is a very good _____ 00:25:24 I would _____ 00:25:25 here in terms of Q2. When we look into the entire year, I think that towards the end of the year, based on the level of activity that we see now in the beginning, we can have a wonderful year.

Going to the first question, Thomas, it is still early for us, because we just started shipping, but our partners are pleased and very positive about the level of activity that they are seeing in the small and medium business market for their appliance products. This is the feedback we get in talking to them today and on a daily basis.

A second followup on that. The Ericsson _____ 00:26:02, is that something you have started shipping? What is the status on that?

There are some boxes there. The software initiative 00:26:11. As for the consumer market, _____ 00:26:13 what we call the small and medium-sized business in the market. _____ 00:26:17 Ericsson and we have started shipping. I am not sure how much we shipped, because it is mainly for Ericsson's selling to a cable operator, and I would guess that it helped individual box sales, large sales to cable operators who operate consumer cable networks, but we do know that they have some customers doing that. We did not recognize revenue from that, I mean Ericsson did pay and there are _____ 00:26:41 revenue, but since it is done in _____ 00:26:43, which is a subsidiary, right now we have not recognized any revenues for that in Checkpoint books yet.

Thank you very much.

Ivan _____, Goldman Sachs.

Thanks a lot. Congratulations, guys, on another great quarter. A couple of questions, some of this has been asked already, but I wonder if you could touch on linearity or, if you want to phrase it in different way, what you saw in January-February and what it is looking like in March-April. There are some signs that things may be picking up from the enterprise software side from what they were a couple of months ago. Any change, or has it just been pretty linear since the beginning of the year?

I think it is a tough question. Yes, we have seen the right level of linearity and we have seen the good times. _____ 00:27:43-5, but again I think this time it would be careful to say that the market condition _____ 00:27:52 make everyone less predictable, let us put it this way. So I would hate to say now...if you look at the past I think we would have a great level of confidence in Q2, but since the confidence was eroded in the last few months in the entire market, I would be careful this time.

Okay, and if I could just follow up...Do you want to touch on something _____ 00:28:19 right at the outset. You mentioned that the change in the business model, I think with Nokia, cost you, or had a change in your revenue of, about $2 million. Is that to say that had you not changed that model going into the quarter your revenue would have been $147 million? Do I understand that correctly?

Yes, you understood it correctly. When we changed the way we sell the Nokia product, we also start selling the Nokia boxes; they sell the boxes and we sell the software, so those revenues are missing. As I said in my comments no impact on the bottom line because it has improved our margin. Those numbers are missing from March sales 00:29:04.

Finally you broke out Asia-Pacific at 18% of the total revenue. Would you be willing to break out where Japan was of that?

Japan, I think, was reasonably close to 10% of the total revenue...

...close to 11%...

...Like Eyal said, close to 11% of total revenue. Japan was very strong this quarter because it is fiscal yearend. So as you all know, we are all concerned about the Japanese equipment need and the recession there. I visited Japan during the quarter. I saw a lot of activity, I also feel that the Japanese people are concerned about their economy. Q1 was a very good performance, just like we would expect; it was actually slightly over the plan that we had for the end of the fiscal year.

Okay, great. Finally, are you seeing any change in pricing structure or pricing pressure in the market this quarter, particularly given customers being more concerned about their IT spending?

I believe _____ 00:30:02 should be ______ , I mean customers are more concerned about the cost. I think a lot is going to the hardware side, because as you know the Checkpoint system - the software - is one piece, but the software represents, let us say, between 20% and 40% of the system and additional cost including the channel margin, installation cost and hardware cost represent the other fees 00:30:26. So we feel some pressure on the hardware side, therefore we are working hard to work better with our partners and to have more hardware available at lower cost because we think that most of the pressure will be there. We have seen a lot of opportunities open up in the lower part of the market in terms of _____ 00:30:47 for the branch offices - things that customers were less concerned about in the past, as you know - we talked about it a lot last year and we have developed this kind of platform, but we are now starting to see the customers explore them as well. So I think this is the general trend that we have seen in the quarter. Jerry, do you have anything to add to that?

No...very well said.

Okay, thanks very much.

Sterling Nottie, JP Morgan

Hi, guys. Just two questions. First, the service provider market represents 20% of revenue. Can you give us some additional color of areas that you are seeing strength in, whether by geography or product or industry? The second question is I think deferred revenue was a concern on investors' minds this morning in terms of sequential growth. If you can break down deferred revenue in terms of what the areas are that, maybe, we do not see as much deferred revenue contribution than we did the last couple of quarters, that would be great.

I will try to answer the deferred revenue part. I think what we have said in previous quarter and we still say, we do not expect deferred revenue to grow every quarter. Actually, we were quite surprised to see deferred revenue grow in this quarter, because I am not sure if that would be what I would expect in this quarter. We have in the deferred revenue a part which is some services, a critical system _____ 00:32:09, we have a part which is product _____ 00:32:10-16. So I would not say that I am very proud that in light of the market condition we are able not only to achieve very nice revenues but actually to grow the deferred revenue. I will reiterate what Eyal has been saying for the past year - deferred revenue will not grow every quarter. The other part of the question...

If I understand it right, Sterling, I do not know if we see any more granularity, if I fully understand your question. The service provider business is 20% of the _____ 00:32:46, so it is a really viable and important channel for us, and it is equally across all geographies. So I think we continue to enjoy the success of that channel consistent with our growth rate, as we described 2-3 major geographies.

Just on the service provider front. I think we have got some mixed signals. When you talk to some service providers, you see the strength and their business going out to customers, yet when you talk to some of the other vendors in the IT security space you may get a different answer. So I did not know if it is something where you are just gaining mind share and market share through that channel, or if there is just continued strength from _____ 00:33:25 customers that you are seeing.

One of the things I would say is that for a lot of them this is a value-added service as they are going back into their customer base to provide a tool, versus...I do not know who the other vendors are that you are talking about, but if some of it is to extend capital expenditure and to establish and create new connections that might be a different issue. But most of the service providers that we are working with are bringing solutions to their installed customer base in adding more value and services to that relationship.

Yes, and I think our solution, finally, is one of the easy investments because the return on investment and the profitability on our equipment _____ 00:33:59 fairly quick. However, I would add again that I would take the cautious side this time. We did see a lot of new service provider customers, I think we see a very good _____ 00:34:18 We have also seen _____ 00:34:21 that has big _____ 00:34:22 and even though security sales are going well, if somebody is laying off 5000 or 7000 people, there is some hitch 00:34:30 there, and _____ 00:34:31 which specific channel will not be as big as during in the previous quarter just because when turnover like that happens in any customer we are not exactly focused in generating the sales that they are supposed to. So we have seen one or two of these in the last quarter, I am glad to say that we had our service provider _____ 00:34:51 and created new deals and contributed to the nice results that we had from service providers. I think that over the next three quarters we will see a mixture of enhancing _____ 00:35:02 sales because it is profitable and this is one way that we can generate nice profits in a relatively short period of time, and we will see others that are facing problems in other places and therefore are in a little bit of stagnation, but it will stabilize over a quarter or two. Jerry, anything to add to that?

That is absolutely right.

Thank you.

As a remainder to our audience that is *1 if you wish to add a question and once again due to time constraints we are asking that our audience only ask one question per participant. we would take our next question from Chris Ross for First Union Securities.

Congratulations on a great quarter. Question for you regarding the competitive landscape vis a vis the Cisco Pix firewall division, their VPN-concentrated division, as well as NetScreen and Nortel. Do you think you are growing in line with the VPN market, or do you think you are still continuing to take share from some of these other players?

There is not really an anecdotal evidence, because there really is not good market stuff out there, but from everything I know, talking of customers and partners and looking at a lot of the major competitor _____ 00:36:14 I think we continuing to gain market share. Every indication I gather as to who we are, what the product is, what it does, the functions, the features, the quality of the solutions - so I believe we are continuing to win market share out there.

And from an anecdotal standpoint, I would say that last year we have seen more and more of Cisco, not necessarily that we are gaining share, but we are seeing them in many accounts. This quarter, I must say that my feeling again, speaking to customers, is there was less of Cisco out there.

What about the difference between the service provider and enterprise segment? Is it the same there? Are you gaining share in both segments, or more so in the enterprise versus the service provider market?

I think in both. Seems to be pretty consistent, in my view.

Chris _____, Robinson Humphrey

Hi. Most of my questions currently have been asked, but I did have a follow-up question. I guess this is somewhat tied to deferred revenue: did you get to see any change in terms of renewal rates for maintenance contracts this quarter versus past quarters or a change in rate of initial adoption of maintenance contracts?

No, we are tracking these numbers and the trends are pretty consistent.

I would say, however, that we are working with some new clients/plans there. _____ 00:37:46 a good _____ rate in terms of subscription contractors _____ 00:37:53-55 for support reasons, but we are working on some new initiative and I would expect that towards the second half of the year we will even see a nice increase there even though this is an area that is clearly a little bit ahead of our expectation even now.

Charles Leon, CIBC World Market

Good afternoon, gentlemen. All of my questions have been answered, thank you very much.

Chet Jones, Salomon Smith Barney

Good morning, or good evening over there in Israel. Let us talk about R&D for a moment. It continues to trend down as a percent of revenue and from a dollar standpoint was a very small sequential increase. As you continue to develop new products, why are we seeing that continue to trend down?

The percentage is less because Tocal 00:38:56 were not able to grow the R&D as fast as the revenues grew, because revenues grew ahead of expectation. Last year we faced a very challenging condition in terms of hiring people; it was really, really hard a year ago to hire good people and while we have been able to hire the people that we wanted, it was really challenging to hire them. This quarter, the market conditions in that have completely regressed. Now we get excellent people, the salaries in R&D for new people obviously are trending down from _____ 00:39:28. In Checkpoint the change is not big because we were very aggressive in raising salaries last year, so we are not trend down for new hires this year, this March. But in terms of market place, we have seen in the Israeli tech market salaries going down by 30% and even more in the critical R&D position. We are getting excellent people now in the R&D and we are really focussed on the quality of people because my belief has been, over the years and still is, that good software products have generated ______ 00:39:59 mass of he people but we are really focused on the excellent people who can do a lot in a very small and very productive group, and I think our R&D management here is doing an exceptional job now in raising the level, building new products, and hiring. The quality of the people which we have just hired is very, very impressive. _____ 00:40:22 for years, and I only say good things about our developers, including now.

And on your comment on new products, you started talking at your user conference about, I will call it an extranet-oriented solution, with an announcement this summer of availability late this year or early next year. Can you give us some color on what we are looking for on that?

I would call it an early start in/into 00:40:46 the extranet market place. The one thing that I can say is that we see a lot of interest in that product - how do you mange security in an extranet environment. And there are two elements of that - how do you tie the VPN to the extranet application, to the business application, and the second element is how do you limit security in an environment that is not centrally concerned, when each company controls its own security policy but we need to trust other companies which we are going to manage. So that is a very interesting area and very interesting product. I think we are making nice progress in the concept, in the product, which is really something new and exciting. The market in terms of extranet and so on has been growing/going into a little bit of a shakeup, and I think it will be a very, very good market, I think it is an even better market condition for Checkpoint; people are going to realize that the return on their investment, the cost, the economical efficiency of the solution does matter, and I think that is where we can show very, vice nice results there...so overall I think that should be a very good initiative for the future. This concludes today's question and answer session. At this time, I would like to turn the conference back to our speakers for any additional or closing comments.

Thanks everyone for your participation, and we really appreciate it. If you want to speak to management or Investor Relations following this call, please call our Investor Relation Department in ______ 00:42:19 City at 650-628-2050, or my office in Israel at 972-3-611-5064. We will try to accommodate everyone and will talk to you soon. Thank you.

Thanks, everybody.

Thank you.