Check Point Software Technologies Ltd (CHKP) 2002 Q1 法說會逐字稿

Good day everyone and welcome to this Checkpoint Software Technologies fiscal 2003 first quarter financial result announcement. Today's conference is being recorded.

For opening remarks and introductions I will now turn the conference Ms.

, Director of Investor Relations.

Please go ahead.

Good afternoon ladies and gentlemen and thank you for joining us to discuss the first quarter of 2002.

As a reminder, this call is being Webcast live from our Web site and a replay will be available through May 7th on the Company's Web site at www.checkpoint.com/ir and via telephone replay. If you'd like to reach after the call, please contact the Investor Relations Department at 650-628-2050.

On the call with me today is Gil Shwed, Chairman and CEO, Jerry Ungerman, President, and Eyal Desheh, CFO. Before we start our management presentation, I would like to read the following disclaimer.

During the course of this call, the Company will make certain forward-looking statements concerning trends during the first quarter and revenue and EPS growth for the future. Other statements, which may be made in response to questions, which refer to our beliefs, plans, expectations or intentions, are also forward-looking statements.

Because such statements deal with future events actual results could differ materially from the Company's current expectations and are subject to various risks and uncertainties as discussed in our Annual Report on Form 20-F for the year ended December 31, 2001, which has been filed with the SEC. The Company assumes no obligation to update information concerning its expectations.

I'll now turn the call over to Eyal Desheh our CFO to discuss the financial highlights for the quarter.

Hello everybody and thank you for being with us.

Hopefully, you all had a chance to review the press release and financial results.

Following is some of the highlights.

Net income for quarter was $63.5 million or 25 cents per share diluted and revenues for the quarter were $104.6 million. Net cash flow for this quarter was $78.4 million bringing total cash and interest bearing investment at March 31, 2002 to over $1.1 billion.

Checkpoint's operating margins were 60 percent in Q1 this year and net margin was 61 percent. Total cost of sales and operating expenses for the quarter were $41.9 million, $1 million less than in Q4 2001.

Head count at the end of Q1 2002 remained stable with about 1200 employees worldwide.

Now let's look at some key -- other key financial metrics for the quarter.

Software subscription revenues were 28 percent of total revenues for the quarter, up from 26 percent in Q4 2001 and technical services revenues were nine percent of total, up from seven percent in Q4 2001.

Consistent with market trends, we still had a decline in the number of large orders booked this quarter. While the total number of orders remain the same in the last two quarters and discount and product pricing remains stable, substantially all of our revenue decline came from orders larger than $10,000.

These

presents 57 percent of our business in Q4 compared to only 52 percent of our business in Q1 2002.

Strong collection reduced our account receivable from $74 million at the end of Q4 2001 to 63 million this quarter and improved DSO, day sales outstanding, to 54 days at the end of this quarter from 57 days in Q4 '01.

Deferred revenues at the end of the quarter were $95 million, the same level as Q4 '01 and last, the results of

, which focuses on consumers and small business security solutions, are now consolidated in our financial statement. Well this summarizes the financial results, and I'd like now to turn the call over to Jerry to discuss the quarter.

Well thank you, Eyal, and hello everyone. I would now like to share some of the trends we've seen during the quarter much of which we've already discussed on our preliminary first quarter call on April 4th.

In the first quarter, Checkpoint continued to generate strong earnings despite the slow business environment. We believe that the major reason for the slowdown in business is the very weak enterprise capital spending and especially the information technology spending levels experienced revenue declines in this economic environment.

We believe this may be a combination of overspending in 1999 through 2001 and an overall economic slowdown.

The overall feeling was that customers were not anxious to commit large portions of their budgets at the beginning of the year.

On the other hand, our sales force continues to work many exciting opportunities in the marketplace. We continue to see a great deal of interest in activity levels from our channel partners and in customers as they look at

implementations for connecting sites, remote employees, and adding wireless capability and access as well continuing to add security solutions throughout the enterprise.

I'll now talk about the first quarter specifically.

Similar to last quarter, geographically, the Americas and Europe, contributed 42 percent and 40 percent respectively while sales in Asia-Pacific and Japan contributed 18 percent. Japan actually improved slightly from Q4 2001 but, in general, there was softness in all markets we serve around the world.

Our installations grew by five percent in Q1 totaling now more than 225,000 VPN and firewall gateways. One hundred twenty-five thousand of these or 55 percent of the total are VPN gateways.

The number of remote access clients, a combination of secure remote and secure client, climbed to over 107 million.

As one expect in a tough economic environment with spending reduced, there are multiple competitors working on a smaller number of opportunities. So while the number of competitors in the security and VPN markets continues to shrink the amount of competitive impact has increased.

At a macro level we feel very good regarding our competitive position. We have introduced many new functions, features and platforms that improve the effectiveness of our solutions in the market.

This new capability continues to demonstrate our ability to meet the needs of our customers for scaleability, performance, flexibility, manageability, and total cost of ownership.

We do believe that in our core enterprise market we are winning a very large percentage of both new business and new customers while also displacing installed competitors.

This includes installed product from other software vendors as well as displacing the installed product from the hardware appliance vendors in the market including some appliances that have been installed for a year or less.

We also feel very good about our opportunities in the new market segments that we are aggressively moving into with new products and partners.

This includes the low end as well as the very high end. In fact, it appears these two market segments are experiencing better growth currently, so once we and our partners begin to gain more traction this should be of benefit to our top line growth as well.

That concludes my comments and I will now turn it over to Gil for further discussion.

Thanks Jerry and hello everyone.

In the first quarter we've seen nice success implementation of our strategies in our core markets and the new market segments. For example, in the low-end space, Q1 was our first full quarter to ship the new Safe@ solution running on the

security appliance.

This proved to be a huge success with more than 3600 units shipping in Q1 alone. These products were also

approximately 60 percent going to new market segments such as the very small business and home users and about 40 percent going to current Checkpoint enterprise customers for small branch office and remote access used by

working over broadband links.

We've also introduced the

product family building on Checkpoint's leadership in the VPN space.

takes you a step forward by greatly simplifying VPN management with

security policies and by introducing a new pricing model that makes deployment very attractive in certain environments.

Another expansion to our client product portfolio was providing wireless access PDAs with VPN access through the introduction of our secure client software for

devices. A new segment in which we had a good start this quarter was the wireless infrastructure space securing

and GPRS roaming network.

More than 60

firewall

have already been ordered.

On the enterprise and data center side, we introduced the virtual alliance

,

,

solution and on the platform side, we've seen a good trend

of both of our appliance platforms and our new secure platform for

for open server. Secure -- the secure platforms allow customers to install our solution on an open inter server in less than 10 minutes -- actually in less than five minutes and provide a

operating system with price performance and

which are very attractive.

This week we're going to meet with our key partners and customer in our Checkpoint experience

and

in

, California. Our

partner has already started to announce new platforms to be demonstrated in the conference.

As you've probably seen yesterday with announcement from

,

and our premier partner Nokia, we also intend to show some new and attractive solutions in the show. We will show record-breaking performance and cost performance, results of

product, as well as some big steps in improving Internet security with new security technology that's highlighted the leadership of our technology and open approach.

Finally, I'd like to reiterate the guidance that we gave on April 4th. Though the ability remains limited, we currently expect a sequential growth of five to 10 percent for the second quarter, additional five to 10 percent in the third quarter and 10 percent or more in the fourth quarter, which translates to about 26 cents in EPS for Q2, 27 to 28 for Q3, and 30 cents for Q4.

But we want to stay conservative in the current business environment, these numbers best reflect our feels and channel forecast for the coming

quarters.

We are very excited about the opportunities and market trends we see and hope that these will start showing up in our results as the economy improves towards 2003.

Thank you for all participation, and I think we are ready to open it for questions-and-answers.

Thank you ,sir.

The question-and-answer session will be conducted electronically.

If you would like to ask a question, please press the star key, followed by the digit one on your touch-tone telephone. We will take as many questions as time permits and we will proceed in the order that you signal us.

Once again, please press star, one to ask a question.

Once again, please press star, one if you would like to ask a question.

Our first question comes from

of Deutsche Bank.

Hi, this is actually

.

Hi, Eyal, Gil and Jerry.

You had talked about some of the low-end segment being a growth driver for the balance of the year; with regard to the S-Box we noticed that there was a separate management platform for it.

Now, can the S-Box be managed by the NG or the SP-1 platform?

The S-Box provides for the new platform for management of the S-Box but allows service providers to manage thousands of devices from one central management.

This is a unique capability, I don't think anybody else in the industry has it and allows network operation centers with the regular network operation center people to manage and give customer service to thousands of customers.

This management system is still built on our policy editor and existing management infrastructure that Checkpoint has to define policies and to define the profile when the thousands of users will be used.

There is a full integration of them. This full integration is implemented in every installation that we have and as time goes, this integration will even be tighter and I think that all of our customers will be able to use with all management tools that we have.

The same management platform basically.

OK.

Then Eyal some housekeeping here, it looks like the tax rate came down about 15.2 percent. Shall we model more towards the 15 percent level or is it in the middle?

More less in the middle. This is about probably where we are and where we are expected to be for the next couple of quarters.

OK, thank you very much.

Our next question comes from

of CIBC World Markets.

Hi, good afternoon Gil, Eyal, Jerry.

Just a quick question, can you just, you know, provide us with, you know, some more color on your, you know, recent announcement of teaming up with, you know,

and maybe, I know, if you can provide us with additional color of, you know, similar, you know, similar deals, similar partnership that you're currently working on?

Thanks.

Well, I'll talk a little bit about the current one as opposed to maybe any new ones, although there are many discussions on going with a number of major players in the market that want to partner with Checkpoint and deploy our technology on their platforms.

This is a growing wave of momentum.

But, yes,

and

have met with us numerous times to reiterate the desire of them being one of our certified platforms that they've been to market, our firewall VPN technology on that platform. They want to continue selling it.

We're very impressed with their plans, their programs, and their desire to do so. So we're going to continue to work together in that relationship in the marketplace.

I want maybe to add about other partners. I mean we have today a very nice portfolio supplies partner that are having very nice devices on the marketplace.

I mean

is one of them.

that announced a product yesterday, provide excellent high-performance devices.

provides a very good platform for scaleable performance.

, Nortel Division is having very nice roadways in the market with very scaleable high-end solutions for data centers and service providers.

That's all on the high end.

On the low end

VPN

,

, which is both from the low end and on the high end of the market and obviously Nokia, which has a very wide product portfolio across all market segments, and I hope I didn't forget too many of our partners because I definitely

mention all of that.

And Nokia alone is probably the largest client, vendor in our market space, not just in the Checkpoint realm, but Nokia's probably several times bigger than

clients, vendor in the security space today across the entire market. So I mean there's a lot of positive momentum and positive traction there, which provides customers with open choices and very good offerings in each market segment.

OK, thank you very much.

You're welcome.

Our next question comes from

of

.

Hello gentlemen.

I have a question for Eyal regarding the deferred revenues. I was wondering, Eyal, if you could give us a guidance for deferred revenues for the second quarter.

If I remember correctly on the fourth quarter conference call, the guidance was pretty correct. You said deferred revenues, there should be no change for the first quarter.

Can you -- can you maybe elaborate on that?

We -- hi

.

We generally you know guide on deferred revenue, they can move up and down $5 million where the level of business activity that we're seeing right now would keep it at this range.

That was

last quarter too plus a minus of $5 million and we ended up not changing it, but I think that's a good range for the volume of business that we're seeing.

I understand. I understand.

And then my other question was regarding the competition, I mean, I think that the market is off, the investors market is a little bit unsure whether how much of it is the weak IT spending, how much are the competitive pressures, you know, what is the feedback that you are getting from your clients when they are -- you are saying that they are delaying the prices because their budget kind of weak or they don't want to use much of their budget in the first quarter. You know, what is your feeling there?

Well, I think they all say to me one of the perspectives is the amount of orders that we processed and the amount of business that we did, I don't remember the exact number here but I know he said it during his part or the conversation, but they're just smaller in size. So we think that points to the fact that we're still doing a lot of business.

We still have a lot of activity. We're still getting a lot of wins and business process, they're just smaller.

So they're holding back the amount. They're not ordering as much in any one PO as they have done over the last few years.

Thank you. That's it.

You're welcome.

Once again, if you would like to ask a question, please press star, one.

Our next question comes from

of UBS Warburg.

Good morning or good afternoon guys.

I remember on the pre-announcement call I asked a question about the license revenue mix that you saw in the quarter, you know, running on the appliance platform, namely Nokia, sometimes you're able to give an estimated percent versus software running on an open server. You said you didn't have the details at that point.

Were you able to get any more clarity on that in the last couple weeks?

I don't have the specifics right in front of me but the amount of revenue from appliance platforms did increase again this quarter.

Is it safe to say it's above the kind of 32 to 34 percent of Q...

Oh, yes. Yeah, it's...

It's low there, I think than that.

Yeah, sure it is.

I'm not sure exactly what the number is but it's over 40 percent.

Over 40 percent now, Jordan.

OK. Thank you.

Now, let me ask the question, part of the NG strategy is that it improves the performance and capability dramatically but there's also revenue opportunity as customers, either existing or new, look to purchase the add-on modules like

and some of the service modules. Can you update me on how that's going in terms of what you saw in the quarter and what you expect going forward in terms of demand?

I think good direction for NG but keep in mind with most of customers do have subscription contract and get upgrade as part of the subscription contract. We've seen some customers that we've encouraged them to renew the subscription contract that they've delayed before and now they renewed it.

actually we've seen some very nice transaction there around that area, and we do have also additional modules with additional revenue opportunity and they're been accepting OK in the marketplace

the market where people are not looking with how to spend their money. Clearly there's not a -- not many upside opportunities are taking place in the marketplace.

OK. Last question would be, you know, when you went back to kind of the -- some of the channel partners or some of the deals you were involved with that, you know, is it still, I guess, as Jerry said, just a no real

deal, but more downsizing or is it, you know, one or the other that you saw -- you've been able to gather now that you've had a couple of weeks to look at the shortfall here.

It's much

-- it's what we said, it's much more of the size. I mean now that we understand the volume of business that we still did and been able to look at the size and really understand it over the last two weeks, it's clearly that the orders were downsized.

They're not buying as much

.

OK, thanks a lot guys.

Thank you.

We'll hear next from

at Goldman Sachs.

Thanks. Hi, guys.

Hi.

Just -- if I could just start as a follow-up to that last question, if Eyal, if you could just repeat those numbers you gave -- the statistics you gave on the size of deal over a certain -- over a certain dollar amount, that would be helpful.

Yeah, what I said is that while we saw that orders at size of $10,000 or lower remain similar in terms of the amount of revenues that they generate, very similar to Q4. Orders which are bigger than that generated less revenues.

Well then almost all the difference in revenues were in Q4 and this quarter came from a smaller number of order -- of large orders. And the statistic that we gave is that in Q4 those large orders and

these are over $10,000 per order, were 57 percent of our business.

It was 52 percent of our business in Q1.

OK, great, that's helpful.

Somebody else -- Jerry, you mentioned that your total installations were up five percent in the quarter -- I don't know if you said sequentially or year-over-year, but in either case, what does that say about pricing or sort of price per unit or ASP if total revenue was down in the quarter, or did I not understand that statistic correctly?

I will try to answer that.

I mean the ASP per product and per products line remains pretty stable. What has changed is order sizes.

I mean people instead of ordering five high-end products order two high-end products and so on. We also had a nice number of

that greatly contributed to the volume and the units that we've shipped, but they're much lower priced.

So per product family that we have or per the price have actually remains pretty stable from an ASP standpoint.

OK but then it would appear that would you do more units, as you pointed out, at the low end, is that accurate now?

Actually more units, they are the low end, absolutely.

OK.

And, then finally, one other question, Gil you talked a lot about as you have in the past, you know, the vast amount of different appliance vendors you're working with, but I think, if I'm not mistaken, the vast, vast majority of the appliance revenue is still only coming from Nokia. When do you think you'll start to see some of your other appliance vendors really to start to kick in, in a significant way, in terms of actual revenue generation for you?

I think today Nokia generates pretty much the vast majority of that and I expect them to continue to be a leader there because they have a good product and a very good sales force, very good brand name and customers are happy with them. However, I mean, that's why we are focusing with each partner about their relative strength.

I mean, Intrusion is already generating nice quantity, much smaller than Nokia but we are significant in the market and many of the others are starting to show signs. So, in the low end, it's starting to be nice with increasing volumes from the low-end partners.

On the high end we are hearing very positive things from high-end vendors that are shipping to large telecoms and to large data centers. It's very hard to quantify it from a unit standpoint; I think it will take time until these units will be a big number.

Especially on the high end. Most of them are in evaluations, I mean, there's a long sell cycle on that very high end so our partners are getting engaged in some but there's many that they were not in because they went on for six, nine, 12 months.

So they're getting involved but it's a much longer sell cycle as I talked about. They've got a lot of activity, lot of test, lot of evals going on but not revenue or a significant nature yet.

OK.

I'm sorry, I did have one other thing, Eyal I thought you mentioned that

is now fully consolidated in the numbers. Does that imply that you've actually stepped up your ownership there?

No, as we said before, we had up to 66 percent ownership of

giving a different type of investment that we have in there. We didn't increase that.

So, you are now up to the 66 percent, is what I'm asking?

Yeah.

Yeah, as we always have and we consolidated, became a part our business.

Great, thank you very much.

You're welcome.

We'll move next to

of Legg Mason.

Yeah, thanks.

Couple questions.

One, just to talk about the opportunity that's out there for, you know, kind of competitive displacements.

I noticed that in some of the promos on the Web sites you know you're targeting Sun and your targeting Cisco and

as well.

OK.

But let me just restate the Sun one.

We and Sun are doing that together. That's a joint promotion with Sun who had decided to get out of the business.

So they worked with us to come up with a joint promotion to incent their customers to move to Checkpoint. And we do have two other promotions on there that are being very well received in the marketplace. I talked about the success we're having and it's been very beneficial to us to have these promotions out there.

And you know one of the reasons, and I think you'll see more in the future is

decided to get out of the business, and so there was a huge opportunity for the installed base

users to look for an alternative. And so we've seen very, very good levels of activity and acceptance of those promotions.

One of the, by the way, surprising things that we've actually seen in the marketplace is actually not just replacing old products with our fiber six years old and vendors that are not doing very well in the market, but we've also seen this quarter some replacements of relatively new appliances are very active

marketplace. When the customer simply decided what their flexibility, the ability to upgrade and the overall value of Checkpoint solution is better and

the products and replaced them with our products.

And again, I don't think the

focus for our business, and I don't think that the main area for growth for anyone in the market

interesting phenomenon in the marketplace.

second question, could you talk about -- you know, you came out recently with a different product, kind of the VPN product without the firewall.

Can you talk about kind of the driver behind that?

We

it's with a firewall, but it's a very simplified firewall, so the level of security is as high as

.

But the -- it's a much simplified firewall that's embedded into it and much simplified installation. Now the driver to that is there is installations that I've focused on the VPN side.

When the

people, it was our focus to quickly installing large scale VPN. It's a new pricing model, a new pricing model we tried to address

because many of his people supposed to be enterprise software guys, but they're looking users like the entire enterprise software industry.

These people may be looking in number of connections, the number of links to the VPN, so the

is based on the number of

pricing model works there. So we believe in that areas of the -- of the replacement of a legacy network, frame relay network

of a building extra net and the Intranet with many business partners and so on, it provides both an easy to implement solution, it's also something that's very attractive in terms of the price of the solution.

And you anticipate that in those sales that most people will have to take on the management consult that you're selling for, I think, 15k?

Well different management consults, but they fit a large installation.

People need the management consults just like in every -- in every product.

OK, great, thanks.

We'll move next to

of CS First Boston.

Hey guys just two quick follow ups and you guys talked about this. Eyal, can you just give us some more information in terms of consolidating

?

Any feel for what the revenue run rate from

was?

First of all, let's put everything in perspective.

The number that

generates are fairly small in comparison to the overall business of Checkpoint. They're less than 01.1 percent of our balance sheet in terms of assets and less than one percent in the revenue, which are recognized.

But so, the expenses of

are between four to $500,000 a quarter as we have said before. It didn't increase.

Gil talked about the volume of business with 3600 boxes that were shipped, of course, not everything is recognized. I mean,

revenues as we apply the regular accounting methodology that we apply to all of the Checkpoint business.

And the level of profit that it contributed was very, very minimal although it was positive.

Can you talk about, in terms of, are you guys still manufacturing the box itself and how do you see that evolving now that you own the majority of this thing?

Well, the boxes are being manufactured by an outsourced manufacturer and they have been and will continue to. We are shifting a lot of the hardware business towards our appliance partners and if you've watched carefully, you've seen announcement from Intrusion, from Celestix and yesterday from Nokia about introducing a

based appliance that they will take to market.

Our commitment is to make sure that these solutions are available, are competitively priced and are available at the right market segments in the marketplace. And as we stated four months ago when we launched S-Box, wasn't that long ago, said that our intent is not to win the harder business but to get it jump started and then transition it to partners.

So I expect with these execute on their announcement and start shipping product we will get out of the hardware side of that.

Two additional follow up questions.

You guys have talked about the competitive landscape and, in fact, displacing some recent appliance vendors.

Clearly one of your larger competitors reported results where they showed a very nice sequential quarterly growth rate, so it would look to be that they are taking share from you guys. Can you talk about what's going on and why is it that you've got a, you know, sizable competitor capturing share?

Well, one we have to understand if it's really capturing share or not. I know at a macro level it could look like that, but when you analyze a lot of people and say what market segments are they in and where are they generating their revenue, and if you surmise like they said months ago, that they don't really compete with us because they're in a couple of market segments where we are not involved in, the very high end and the very low end, and I'm

very high end, the $100,000 $200,000 kinds of solutions, we're now getting into both markets and we've said here's our plans and here's what we're beginning to execute in them, and we have a belief that those might be two of the faster growing market segments.

But when you look at it on an apples-and-apples basis side, and I've not looked at their numbers, so you could tell me, but you can break out 30 to a million. You can take out whatever support subscription is and say OK, what was product revenue.

I can tell you that the hardware component is probably at least two to three times what the software value is. On the high end I know it's 10 to 15 times hardware revenue versus software revenue.

But I could quickly analyze and say that out of that three million additional they did this quarter over last quarter, three or 400,000 of it, maybe 500,000 was software revenue and of that, maybe 100,000 or 200,000 was in the enterprise market where we're generating most of our revenue from.

Now I'm actually working either way. We can -- but we've got to do apples and apples.

Either we get to add in all the hardware revenue that our partners got from the customers, et cetera or try to strip out and do an apples and apples on software base, so ...

Let me ask you that question Jerry.

If you were to add in all of your hardware revenue -- your revenue stream, would you guys have grown -- would that total base of revenue grown sequentially this quarter, if you looked to your hardware

?

I don't think that

that much in

our business last quarter.

That's why I think

clear indication, as we've said. But I think that business, it probably would be double or triple than our revenues, which puts things in perspective.

Right.

And

people are going to more expensive platforms as opposed to open server platforms, so if people are spending 15,000 instead of 3,000, the answer is, yes.

Yes?

I mean that's an if that we'd have to look at.

Yeah.

Because as you probably know, appliances are much more expensive than the equivalent open server platform.

So there is more hardware revenue associated with an appliance and there is an open server that we deploy on. So you could paint some scenarios that would look at that to say yes, our revenue would have been up because of the growing importance of appliances or the fact that we're deployed on -- a higher percent of our software is deployed on appliances this quarter versus last quarter.

And if you can say that they sell for two to three times what an open server does, yes, our revenue would have been up on an apples and apples basis.

OK. And last question for you: You guys have talked about smaller order sizes but the number of orders, you know, still being healthy.

Can you read into that trend at all and is there indication that, you know, the installed base or the build out of the infrastructure of the enterprise is starting to slow down so companies don't need a hundred firewalls that they may have needed, you know, two years ago and now they're buying incrementally smaller lots? I mean is there any kind of broader trend that you guys see in those numbers?

I wouldn't see the trend. I mean the trend is simply that they are reluctant to place the orders.

I mean the amount of large projects that we're working hasn't been decreased. The amount of projects like that's been closed in the marketplace has decreased significantly and that's what we hear on every project that we look at.

So, if before a customer would say, OK, I will take 210 product and just place the order, today they would say OK, I need two immediately and eight I'll order later in the year.

In our business, generally, not a lot of the business goes on initial large orders so the change exists but it's not a huge change but it still exists.

On the hundred and 200 unit orders we've seen several bills of lading in Q1 pretty much 80 to 90 percent of them are the people who told us we would like to buy a hundred site deal in Q1, defer the decision to Q2 or they might defer it again. Only a very small fraction of those will actually sell through and close in Q1 and, again, regardless of whether we want it or we didn't need it, just most of them said, OK, we need more time before we can commit.

OK and I apologize, one more follow-up question. If you guys will look at your guidance, you know, five to 10 percent sequentially for the next two quarters, given the decline you saw in this quarter and the continued kind of lack of visibility, you know, how confident are you in those numbers and does it assume any type of spending recovery or just status quo from Q1?

Well, these numbers always leave -- visibility is limited and we all know that and predicting a future when things are growing very fast and when things are not growing very fast is always something with high risk so I want to emphasize that.

These numbers best reflect what our channel partners and our field is telling us and the run rates that we are seeing so I don't want to and it's not our expertise to model the economy or to do anything in light of the economy we are trying to be conservative.

We could have been more conservative than we are today but we also want to reflect what we're actually seeing in the marketplace. I mean, we answer to our shareholders.

If we would be extremely and yes our channel partners and our sales force is telling us that they can sell more. So I think we present a good balance or a good reflection of reality, this is what our channel partners and our field people are working on and think that they will close in the next quarter or two.

OK, thanks guys.

We'll move next to

of Robertson Stephens.

Thanks guys. I just have one quick question.

On pricing, you said earlier -- and I think I heard you correctly, you said the VPN competitors in terms of numbers have gone down, but the price impact has gone up. Can you be a little bit more clearly on, you know, what's happening regarding pricing and I think you commented that pricing hasn't changed that much, but you know what do you expect going forward in terms of the pricing of both VPN and firewall products?

Thanks.

Well, what I said

, I mean you're absolutely right -- is we see fewer total competitors out there, but because there's less spending going on, there's more of us involved in every deal, which is one reason it's lengthening and two, yes there will be price competition.

I mean there's a list to everybody's decision criteria, and it's going to be up to, you know, our own people as well as our channel partners to make sure we correctly address all of the relevant issues versus our competition on price, on manageability, scaleability, performance, total cost of ownership. They're all there -- we think we can do very well when we're there, when we're in there, when we are doing our best job.

That doesn't mean we don't get outsold at times, the collection of the Checkpoint meaning my sales people as well as our partners. It does happen -- it will happen.

But price is going to be an issue. I mean there's price -- there is competition and price is one of the elements of the decision criteria, so we're fully cognizance of that and capable of dealing with it, we think, which is why we continue to push and bring out, which Gil said you'll see this week, some tremendous new price performance alternatives that the marketplace and customers will take advantage of, I believe.

And one more thing that I want to add to what Jerry said is the business model. I mean we have a software business model and the software business model is a very good one in this kind of environment.

The gross margins are not affected by the pricing and the flexibility of the business is very big and what we did see in the marketplace is that there's a lot of competition, but big part of it is taken by the hardware vendors and especially because the hardware vendors also generate a lot of money

. So a big part of it is taken by the hardware vendors when I think there is much more -- much

to price erosion and to a margin erosion and so on -- not that we don't see that as well and not that it won't affect us, but we're a much smaller

and that's one of the benefits of having a software business model.

Thank you guys.

We'll move now to Sean Jackson of Avondale Partners.

Yeah, good day. Again, just to -- you mentioned in one of your responses about the very high-end market, how you guys are just sort of creeping up there.

Can you tell me just the status of that? Do you guys have a competitive product right now in that 100k to 200k range and what are your plans going forward in that range?

We have great product in that marketplace and for a long time.

I think that our product not priced at $100,000, we are priced much lower than that. Sometimes the hardware complement of that is priced at very nice pricing and we have amazing results there.

I mean you can generate to the Checkpoint platform two gigabytes per second on $3,000 or $4,000 platform and these numbers are likely to be updated soon. You can work with Checkpoint and one of our appliance vendors whether it be Nokia or several others with their smaller supplies vendors to generate amazing product at the $100,000 price point.

I mean we have great, really great product in that space.

Is it generally Nokia as the platform that you're using?

Nortel's up there. I mean, you know, Nortel's been shipping.

They've got a very, very good high-end appliance as well.

is moving in that area.

Crossbeam, CoSine, so there's going to be a number of players up there that are still getting into the marketplace and are still in trial, evaluation phases as they're going through there. But as Gil said

, it's not about who's got the most expensive product, it's got to do with price and performance and capability and scaleability and manageability and as we address those issues and we're doing so in trials, I think we will win our fair share of that business in that market segment.

And just to give an estimate of what, again I don't have data, accurate data, but my estimate of the number of these kinds of few needs in the marketplace is less than one percent and they are important from the standpoint of being a data center in the large scale environment. But in terms of the overall contribution that they have on Checkpoint results right now, it's most likely to be much higher than one percent because the softer confidence doesn't scale as much as the harder confidence scale in that regard.

So keep that in mind too. But I think that it's much less than one percent of the units in the marketplace, which means practically few hundred units every quarter and I think that we get very nice share of those.

I mean we do sell a lot of those.

OK, thanks.

And Eyal what is in the financial income, the net financial income item, can you differentiate between what is interest income and foreign exchange gain or loss?

It's mostly just income with very little foreign exchange gain or loss because we hedge our assets.

Most of our currencies use those. Anyway, so most of this is interest income.

OK. Fair enough, thank you.

You're welcome.

Our next question comes from

with Commerce Capital Management.

Yeah, good afternoon.

I have a few questions -- first of all, just inventory. Can you repeat what the revenue for product subscriptions was?

Yeah, it was ...

The breakdown.

Yeah, 28 percent was to software subscription, nine percent was technical services and the rest was product.

All right, thank you.

I am a little bit confused about the

situation. You now own 66 percent, but

you only own 20 percent, so can you explain a little bit how that happened?

We own about 60 percent of

, and that's what we have always owned. The different instruments, equity or convertible doesn't make a big difference, but our ownership is around 60 percent.

And we sell all of our products, recognize all of our revenues, and the expenses, so I suggest that -- I mean there's 20 people -- less than 20 people employed there, and I suggest that you guys try to find things that are more interesting to look at than the expenses or the losses or the gains that 20 people that our profitable business are generating or not generating.

OK, sure.

Can you tell me the VPN as a percentage of revenue, you said that 55 percent of the installed base is VPN, but if you look at this quarter, for example, how would you characterize the percentage of revenues from VPN?

I think it's around two-thirds.

I don't know if we had the number right here.

We'll find

.

We'll look at it and answer you

, but I think it's around two-thirds or something, but ...

OK, how about the number of customers that you have now?

We have -- we have close to 100,000 accounts. We don't have the exact number

and exact count right now, but that's the number of accounts that we have.

OK and another question, I think somebody asked a question, but I don't -- I'm not sure I understood the answer. Is the

, is that platform manageable from the same management consult that manages the other

the

or do you need a separate management consult for that?

box or you can take it install it in your house

without needing any management platform and configuring. There's a Web interface that everyone can manage it -- it's a very simple one.

You don't need ...

You don't need management for that.

Now if you want to be -- to be managed, for example, if service provider wants to provide managed service to thousands of small businesses or tens of thousands of consumers, we have a new management tool called

or

secure management portal that allows service provider to manage thousands of devices like this and these are to be used also by enterprises to manage of hundreds of branch office sites and so on and if the company or the service provider wants to provide customized services or customized security policies they use the Checkpoint management tool to provide those.

So the management infrastructure is fully structured, it's fully streamlined from the Checkpoint management console to the SMP to the individual management of each device on a web interface.

And that provides all the management flexibility that customers will need in that environment. And I encourage all of you to go to www.s-box.com, buy one and see how the management is working and how simple it is.

OK.

I was actually referring to the fact that if you can manage, say you had a provider one management system, can you manage the fiber one, VPN-1 boxes that are out there maybe on Nokia boxes and then if you have also a few hundred S-Boxes, can you manage them with the same platform or do you need a different? You need to buy the SMP for one and the provider one for the other one or not?

They all integrate with one another. The provider one is another layer on top of the Checkpoint management infrastructure with which you can manage multiple customers, multiple accounts and S-Box accounts can be one of the ones that you can plug into a provider one or to any management infrastructure.

OK.

It's a very different scale.

I mean the people who use provider one, just for everybody's understanding, are charging thousands of dollars per month to get security policy managed and we maintain high level of personnel with our security experts and very high level of customer service to large enterprise accounts.

The people that are intended to buy the S-Boxes are the ones where the service provider is not intending to have a lot of security experts monitor any calls.

Provide very simple packages and different plans that you can subscribe, unsubscribe or move between and be much more sales managed. So, it's very different customer profile and it's not just a different price for the same thing.

But if I am enterprise that already has a number of VPN-1 firewalls out there, larger scale and then I want to deploy at my smaller branches, S-Boxes, can I use the same management platform to manage all the boxes?

You can take advantage of everything you own and build on top of it and it all works together.

It all interoperates, so the answer is yes.

OK.

All right. Well, thank you very much.

We'll move now to

with J.P. Morgan.

Hi guys.

Couple of questions.

Has there been or do you intend to have any kind of structural change in the way that you price your products through any of the distribution channels?

Not sure I know what that means.

In other words, if I'm a distributor, am I dealing with two invoices, one invoice, is there any change to the way you're pricing

the change that we saw early last year?

You mean with our appliance partners?

That's correct.

We've not announced it, but we are looking at bundling it again on an OEM basis and letting them resell.

And when would that change take affect and would it have any impact?

I mean we just want to add the option, so somebody that wants to buy the hardware and the software will be able to do that and somebody that wants to buy the entire solution, may be able to do that as well. From a Checkpoint perspective, it's not going to have any meaningful impact on our pricing or revenues.

Right.

And we're going to just look at it as adding an option for those that want it

to do.

OK, second question is as you look at the orders over $10,000 where you said you saw the weakness, is there any particular distribution channel meaning is it major distributors? Is it some of the smaller

?

Is there any trend that you can point to in terms of where that weakness came from?

No, no

here.

We've analyzed it and

to see is there at some point it was weaker

the answer is no.

whatever, it was ...

Right.

Very consistent.

Look at the geography or look at the channel and basically we've seen very similar phenomena throughout this

.

OK and then, last question is we've seen a number of partners on the appliance side, as you mentioned,

and Nortel and the like, is there a point where you've cut off the number of appliance vendors that you end up dealing with or is there a concern that at some point, if you get too many, they'll be bumping into each other and cannibalizing price out there in the marketplace?

I think there's going to be a natural aspect to it in the marketplace, that the marketplace is going to decide who they want to buy the Checkpoint security application from -- our firewalls,

on what platforms, and I think over time that'll happen. I don't know that there's going to be any cannibalization necessarily, but I do think those would show the

go out there and execute with the quality of the platform service, support, the logistics, you know the function features that they have.

Over time some won't make it and then some will.

And I think with our approach has been very consistent in that and over the years.

(A), we believe in the open market and we believe in competition, and our

approach means that if a partner comes to us, we have a very clear business terms under which we support a new platform and if it works

we'll support the platform

doesn't. Our focus right now is not on encouraging 10 new companies to build appliances.

We've

very good appliances in the market and right now we will -- we will -- we'll sign up more partners if that makes sense and there are a lot of opportunities. Our regional companies may provide localized version for a certain market.

There are some opportunities but our focus is not the world number of supply partners but showing the value and the differentiation for each different partner that we have today.

OK and actually one more last one.

On the wire load on the GX, the wireless infrastructure product, the 60 units or more that you said have already been ordered, are they means for new installations? In other words, is that new 2.5 and 3G infrastructure that's being built out?

Starting out with six first.

OK, sorry six.

Just six?

It was six and we offer and, I mean, all the GPRS new operators are new sop I mean in that regard.

The operator themselves are very known big operators. They are not new operators. The networks are new networks and that's a very nice number and a very, very high revenue with six.

OK. Great.

Thanks guys.

We'll move now to

of

.

Hi guys.

Had a question about the trends you're seeing in the service provider market.

In the past you'd talk about that as a percentage of revenue, can you give us that this quarter?

I don't know right away what it is but the service provider market, I think, is a little bit stabilized now.

We see last year a big decline in that sector and this year it's been stabilized so there's a lot of, you know, outside opportunity there because we're working on many exciting deals on that market. We believe at the current level that we have there is reasonable and every deal that we win there is a nice up side because many of these deals are multimillion dollar deals.

Yeah, it's still slow and low, Chris, compared to what it, you know, had been pointing to. There's still a number of them that are having difficulties but some are doing better again so having a long-term is going to be a very good channel but it's slow right now.

Yeah, I guess, I was just trying to assess how much that segment of the market contributed to the, you know, slow down at the higher end of the range.

But remember that is a channel not a necessarily a market.

You know, they all have to go find the ultimate user of the technology and the solution, which, you know, for the most part is an enterprise space or small/medium businesses or whatever, so it's just one more channel of where does the user buy it from. I think it's a long-term very viable channel.

I think they've all been at least the major telco's have lost a little focus on that particular piece of value added revenue that they were going after.

OK and then, I think people have tried to ask this in terms of other verticals that you may have seen particular strengths or weakness and particularly the government vertical.

Any signs of spending materializing there?

We're real excited about the government market.

I've always been, I guess, the water on the coals of saying it takes the government longer than everybody wants, expects or would like to, but we had -- it's not

yet, but a significant win with the U.S. government that I think is the first of many that we'll see during this year.

OK, thanks.

We'll move now to

of A.G. Edwards.

Good afternoon.

I was wondering either Gil or Jerry if you comment from a, let's say a sales force or channel management perspective, how you're attacking it at a high end or low end, given that's where you see the growth coming.

Well we -- you know we do it through a combination of things.

It's, you know, through our partners -- one -- and we've got a lot of different sales people out there. We have the Checkpoint sales organization, which is divided into two of

,

that's out there calling on the largest companies in the world, all the major accounts -- well known named ones, at least most of them.

We probably don't get to every one of them yet -- as well as people that are going in developing the channel, the Checkpoint channel. But now we've signed up a lot of appliance partners and have their own channels, their own direct sales organization, their own resellers that are going out to market.

So I mean, for example, Nokia's got a very large sales organization that's out there calling independent of us, on their named accounts, large accounts and through their channel partners. Nortel's got a very large sales organization calling on their customers, that they're bringing us into deal.

So, it's a combination of both our own

people as well as our channel partners and then our appliance partners, our

partners bringing us in the opportunities as well.

Great, thanks.

We move now to

of Lehman Brothers.

Good afternoon gentlemen.

With respect to second quarter guidance, the guidance that you're providing kind of presupposes that some of the deals that did not close in the first quarter will close in the second quarter. What gives you that type of confidence this early in the quarter that some of those deals will come through?

Well the guidance that you get for Q2 reflects no more than what our people think that they will sell in Q2. It has little to do with Q1.

It has little to do with many other things. I mean our people go every quarter to their accounts, to their channels, and they access what they think they will sell, and that's what we think they will sell.

OK, thank you.

You're welcome.

All right, we'll take one last question please.

Yes and our final question comes from

with First Analysis Corporation.

Yes, thank you, one final high-end question. In the past you've talked about the interest in the gigabit, now the high end being maybe 10-gigabit type throughput appliances but a lack of network architectures that really take advantage of those type of speeds and I'm wondering now that you're in discussing this more with customers if you're gaining an understanding of how those types of speeds are being used in enterprises.

Very few people are using these kinds of speed today.

We have partners by the way that are delivering solutions that are north of 10 gigabytes, talked about it and even shown one on the Investor Day in January. Customers are interested in that.

Customers, some customers, not too many these days, may even order these today. I don't think that too many are using them today to extent that they can or to the extent the solution can provide them with very, very high speed with the 10-gigabyte speed.

On the gigabyte, between two long segments in an enterprise there are two segments that are connected with two-gigabyte Ethernet on the local area networks. On the remote access to the Internet, I don't think that many businesses, if at all, do have single gigabyte links to the Internet that they connect with single VPN or a firewall.

OK. Thank you.

Thank you,

.

That concludes today's question-and-answer session; I'll now turn the conference back to Mr. Eyal Desheh for any closing remarks.

Thank you very much. OK, I thank everyone for participating at this hour.

If you want to speak to management or Investor Relations following this call, please call our Investor Relations department in Redwood City, California, area code 650-628-2050, again area code 650-628-2050 and we will call you back as soon as we can.

Thank you very much and good-bye.

That concludes today's conference.

We thank you all for your participation.

END