Check Point Software Technologies Ltd (CHKP) 2002 Q3 法說會逐字稿

Good afternoon and welcome to the Check Point Software technologies fiscal year, third quarter 2002 financial results announcement.

Today's call is being recorded.

At this time, all participants have been placed on a listen-only mode and the floor will be open for the questions following the discussion.

For opening comments and introduction, I would now like to turn the floor over to Jenin [INAUDIBLE], Director of Investor Relations.

Good morning and afternoon ladies and gentleman and thanks for joining us to discuss the third quarter.

As a reminder, this call is being web cast live from our web site and a replay will be available through October 31st 2002, on the company's web site at www.checkpoint.com/ir and VA telephone replay.

If you like to reach us after the call, please call 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 the future.

Other statements, which may be made in response to questions, which refer to I believe, plan, 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 on our report on Form 20-F for the year ended December 31, 2001, which has been filed with the Securities and Exchange Commission.

The company assumes no obligation to update information concerning its expectations.

I would now like to turn the call over to Eyal Desheh, CFO.

Hello everybody, and welcome to our call.

I will begin by reviewing Check Point's financial highlights for the third quarter 2002.

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

Consistent with our last quarter guidance, net income for the quarter was $62.3m or $0.25 per share diluted.

Revenues were $103.6m.

Compared to the prior quarter, this is a 5% decrease in revenues and a 4% decrease in earnings per share.

Operating margins and net margins remained stable at 60%.

We generated $58.4m in cash this quarter, bringing total cash and cash equivalent to $1.24 billion.

Operating expenses decreased by $3.7m from Q2 level while we grew the organization to 1202 employees at the end of the quarter, an addition of 8 employees.

Product revenues were $60.4 million or 58% of total revenue.

Separate subscription revenues were $33.4m or 32% of total revenues, and technical and other services were $9.9m or 10% of the total.

While the number of orders [INAUDIBLE] this quarter were similar to the one of last quarter, we did win a significant number of solid deals.

However, many of them were not booked during this quarter yet, and as we saw a decrease in the number of large orders booked.

Order over $50,000 accounted for 13% of total order process compared with 17% last quarter.

Jerry will provide some more details on our major wins in his words.

Accounts receivables increased from $59m to %65m, and DSO day sales outstanding were 57 days, at a lower part of our 55 to 65 days range.

Deferred revenues remains stable at $94.6m.

Well this summarizes the financial results, I would now like to turn the call over to Jerry to discuss the quarter.

Thank you Eyal, and hello everyone.

Here is some insight into our business this quarter.

Check Point continued to generate stronger [earnings] despite the difficult business environment.

There remains a lot of activity and interest in the channels for Check Point products.

We believe this will pick up even more, when IT departments spend more freely than they are today.

Geographically the America's and Europe contributed 44% and 39% respectively, while sales in Asia-Pacific and Japan contributed 17%.

Looking into the some of the numbers, we see the gateway shipments grew 10% this quarter, which means our total number of gateways is now over 247,000 units, a 133,000 of those are from our VPN-1 product family, 102,000 from our Firewall-1 product family and 12,000 are from our [safe at] low-end solutions.

The big contribution in the quarter from our [safe at] solutions, which increased 65%.

It is also interesting to note that 95% of our Firewall-1 and VPN-1 orders were for [MG] and ASP stays stable within product lines.

As you heard from Eyal the size and number of large orders were down during this quarter, but we were very pleased that we won some significant new sales with industry leading companies around the world.

The best majority of those wins will be translated into revenues in future quarters.

We had very positive successes this past quarter in winning major new accounts for both firewall and large-scale VPN deployments in every major geographical area around the world.

This was across all industries and sectors and in every case, they were very competitive.

This includes more wins in the wireless infrastructure market for the GX version of Firewall-1 in both Australia and New Zealand and a number of countries in Eastern Europe as well as the first win in the United States.

Provider-1, the unique management product we will built for our service provider and partners, was a big success with many of our largest enterprise customers this past quarter.

We continue to see an accelerating rate of growth with some important management infrastructure product.

Our focus and efforts in the market for small businesses is bearing fruit.

While still early, we received a number orders for initial deployments of our [safe at] solutions that would eventually become installations of thousands of units.

The largest one we received this quarter is from an institution of plans to install 18,000 units over the next three years.

There are many more situations where we received orders this past quarter for less than 100 units that will lead to larger deployments as budget dollars are allocated in the coming months.

The two sectors where we experience the biggest competitive wins were in finance and government.

The government business was not only with many agencies, both civilian and defense in the US government, but also with agencies in many other countries around the world.

While many of these orders are small today, we believe, given the renewed importance of security, especially with the task force on cyber terrorism in the United States, that there will be an increase in spending in this sector.

So we believe it is important that we are gaining this architecture wins, which will have great value in long term.

We enjoyed very similar experiences in the financial sector.

This past quarter we won a number of opportunities at very large global institutions to deploy not only our security technology, but also sight-to-sight VPN's as well as remote access solutions.

Most of them also selected provider-1 based on their determination that was the only management solution that could provide the functionality and scale to manage 1000's of gateways.

That concludes my comments and I will now turn the call over to Gil, for further discussions.

Thank you Jerry.

In Q3, we had some major achievement in our market place.

When it is high to see the immediate financial effect of all the achievement in the current economical environment, I believe that we have the good mix between delivering quality results now and building the foundation for future expansion.

Our accomplishment this quarter includes the shipment of our new SmartDefense technology, setting the stage for next generation active internet security, and 10 additional appliance shipping form our clients partners.

The [INAUDIBLE] group report confirmed in a very comprehensive set of flap test what we have been saying for a long time.

Check Point Solution are not only superior in security and functionality, we also provide higher performance and lower cost compared to our competitors.

This is the result of our open strategy.

One which enjoys the innovation of our people, the general technologies available in the market place, and the innovation of our partners.

Being this [INAUDIBLE] communities continue to pick up on the success of this strategy, and the [INAUDIBLE] group report was only one of several reports for the quarter.

I [INAUDIBLE] so our market share expands to 65% for the past year, compared to 61% a year earlier.

Gartner placed us a leaders in visionaries in two reports, the Firewall report and the VPN report, and these are only a few examples of the attractions we see in market place.

We have accomplished a lot in this quarter, and we have continue to pick ourselves for current and future customer needs, I am encouraged by the activity we see in the channel when the continued important IT managers place on security.

As we look ahead to the fourth quarter, I feel pretty optimistic about our current wins and opportunities.

However, we should also take into consideration the overall IT spending environment.

So, that in mind, we expect revenues in the range of $100m to $108m and LC earnings which will yield and EPS between $0.23 and $0.25 for the fourth quarter.

With that I would like to finish, and open the call for questions and answers.

So I would like to transfer to the operator and I would love to hear your questions.

Thank you.

The floor is now open for questions.

If you have a question, please press the number 1 followed by 4 on your touchtone phone at this time.

We do ask that all participants please pickup their handsets to provide optimum sound quality.

Also in the interest of time, please limit yourself to one question.

Once again, that was 1 followed by 4 to register your questions at this time.

One moment please, while we poll for question.

Thank you, our first question is coming from Michael Turits of Prudential securities.

Please go ahead with your question.

Hi guys.

It was a pretty steep drop in product revenues.

Steeper than we have seen in some of the other sectors like AB and IDS.

I was wondering if you just comment on what you think is going on with demand and obviously therefore on your share as well?, and which is the bigger effect and might be some areas of relative strength and weakness of the [INAUDIBLE] demand.

I will try to address that and look at some issues.

There are several scenes are in the market place that have been occurred, but I think, I wish all the luck to other companies like the companies in the sectors you mentioned for their success, but keeping in mind that first our numbers are not influenced or skewed any ways by any acquisitions.

These are pure numbers what we deliver.

Also from the historical perspective what we saw is with our results are usually delayed three to six months behind from our [INAUDIBLE] this is the result of channel structure that we have, which provides some butter between the market trends, with other companies, with direct sale field.

What we see is also a result of a not being a sister company versus some companies selling hardware, which means the customers pre-order products and we get the orders a little bit later.

So these are the two reasons that you may see some difference between our results and other companies.

I hope that we will see trends like that in the future.

Again, I think that we have good indication on the market place.

We have to remember that these days still the level of IT spending in the overall quarter is still not as what we would like it to be.

Would you like me to go to the next question?

Sure, yeah, of course.

Thank you.

Our next question is coming from Steve [INAUDIBLE] from RBC Dain Rauscher Inc.

Please go ahead with your question.

Thank you.

Just for Jerry, if you could give us any more color on some of these large wins that you referred to are in the quarter.

Are those competitive wins?

Can you give us any color on converted calls or a compensation there?

For Eyal, are any of those revenues on the balance sheet is deferred or are they billed monthly?

Thanks.

Hi Steve.

It is interesting, everyone is of large deal.

I thought the major deals were we got some very significant awards this past quarter, that we have been selected as [INAUDIBLE] vendor to provide the Firewall and VPN technology.

Some of my global, interesting is that we awarded out of London, [INAUDIBLE], or New York and multiple places around the world for the famous petition because we have been [INAUDIBLE].

So, we saw very significant [INAUDIBLE] both in finance and government, some in retail too.

I mentioned financial and government in my comments, but we also saw some very nice orders coming out of the retail sector.

But they just started the initial deployment of technology so they were very small orders that we had in Q3.

But we think overtime as they started to point what we won, it will add to the revenues in the future.

But, they all have been at very high and very large and very big account and very-very competitive with a couple of our normal competitors that we have.

So we are very pleased with the one rate of success that we have had and what we cause some very important strategic accounts.

What was your question Steve on the revenues?

I am sorry his line dropped out of the queue.

The answer will be pending from where to go [INAUDIBLE] to be heard.

None of these large deals seems to be deferred right now.

We do not consider them as part of our financial statements and as we always do.

When we get the orders then we book it.

Would you like the next question?

Yes.

Our next question is coming from Elan _____ of Goldman Sachs.

Please go ahead with your question.

Thanks very much.

Just really two questions, two quick ones.

One on the ESPARK, I think Gil you mentioned a number of 12,000 [INAUDIBLE] gateways.

Can you tell me was that up from a quarter ago?

Second thing is, I noticed a drop in gross margins of about 100 basis points or will extra cost of goods sold, kind of spite hired as it has happened for a number of quarters.

Is that just a factor of a higher percentage of revenue coming from the service and subscription revenue?

Let me try and announce.

Firstly, any change in the gross margin is meaningless.

Our gross margin business is mainly technical service as [INAUDIBLE] we pay salary too.

I do not think that he we can attribute any meaning to a too small changes just like that.

In terms of unit shipments of the safe [INAUDIBLE] and which is not necessarily the [INAUDIBLE] from our partners, I think Jerry, the numbers of the last quarter was roughly 7,000 units, this quarter this is roughly 12,000, so this after the shipment that we had this quarter.

Great.

Thank you.

A lot of [INAUDIBLE] coming today by the way from softer license being [INAUDIBLE] shipping the appliances, so we have seen some nice pick up in our hardware partners.

Thank you.

Our next question is coming from Bob Lamb of Bear Sterns.

Thank you.

Couple of questions.

First of all, could you tell about how much of your revenue came from the Nokia platform and also can you give us some update on the other partner like the IBM, or the HP, are you seeing better attraction there?

On the Nokia platform, Bob, a little over 40% is related to Nokia platform sales.

Yeah it is still early.

We have seen great attraction with the HP-Compaq relationship of what they doing and what they are rolling it out, and it was nice uptake, but it still is a very small partner, very low percent compared to Nokia or any other open turbo.

Some of the appliance partners are bigger.

IBM is the same thing because IBM was specifically just in Germany and that has just been announced so that will be, it will take a little while before you see attraction there.

Okay, Jerry and Gil.

Could you tell about your wave on the consolidation in the industry that seems to be picking up here?

What do you think of Check Point going forward, do you need to acquire any technology, not to go faster?

I think we keep looking for options of technologies there to acquire and to extending into.

So far we have not signed many.

I have not seen any evidence of consolidation in the industry.

I have seen companies buying revenue, I have seen companies trying to expand, but I have not seen too many companies successful in consolidating the key security technologies.

There are a lot of small components in the key sectors of network security of authentication authorization and for the ability assessment and our technology [INAUDIBLE], we have not seen much mix between the [INAUDIBLE] industry.

Thank you.

Our next question is coming from Jordan Klein of UBS Warburg(US).

Please go ahead with your question.

Hi, thanks.

This is actually Greg Marsh for Jordan.

Once again first they get killer reality, you can talk about what you saw geographically, based on what we thought some in terms comparing from other companies you have reported.

There might be a little bit more relative weakness for them in Europe than what you would experience and vice versa little more strength in North America.

I was wondering if you can address what happened during the quarter, any abnormality there, and then also Eyal on guidance, it little bit surprises to hear the lower end of the hundred million for the Q4 [INAUDIBLE].

I was just wondering if you can just give a little bit more color in terms where you are taking us around that.

Thanks.

Let me try.

Atleast we sold most of the world will be having in a similar way, we have not seen real shift in the mix between geography, I think that we have nice wins all over, we have a lots of wins in Europe.

We have many-many wins in the US.

We have some in the Asia-Pacific, and the percentage also remains the same.

So one year we can look and we are trying to look in the micro level to understand the trends on the market level for reasons of big difference between geographies around the world.

In terms of future looking into Q4, as I said, we have a lot of opportunities, we have a lot of potential, but I think that there the market is still showing us that it is very tough spending environment and the level of certainty is not what we would like it to be.

So I think we just want to provide that message.

In previous year we said there is a huge level for opportunity and there is a lot of upside opportunity, I think there is still of that today.

But with the given, what we see around us, we would not like to build a specific expectations that may not meet the general trends.

You also asked about linearity, it was a very regular quarter in terms of linearity despite being a summer quarter.

About 40% came in the last month and 60% in the first two months.

Okay.

Thanks.

You are welcome.

Thank you.

Our next question is coming from Shahu Ilyas of CIBC Word Markets.

Just one quick question.

I have noticed there is some slight drop in [INAUDIBLE] marketing to about 2+ million sequentially.

Is that probably the effect of lower revenues, lower commissions, or are there anything additional behind it?

Should we be expecting the expenses going forward into the fourth quarter?

Thanks.

The slight decrease in sale and marketing result, yeah there is some variable component to sales.

As you mentioned a little less activities during this summer, but not much.

If you are looking at the future, our expenses will go slightly up from this level, but not substantially.

I think in generally, a program like we did a two huge Check Point experiences in the Q2, that had the cost of multiple millions of [INAUDIBLE].

In the summer we had operations but not to the same level or to same expense level.

I do think that in Q4, we will see the general expense level for the Check Point going up to several million dollars.

That is reflected in our forecast, but you should take note of that.

The result in the fourth quarter should be the same level or higher and similar to Q2 unless we have other changes that we will get adjusted.

Thank you very much.

Thank you.

Our next question is coming from Scott Phillips of Merrill Lynch.

Please go ahead with your question.

Hi this is [INAUDIBLE] for Scott.

Could you talk about the uptake on the SmartDefense product during the quarter?

What kind of attached rate did you see with some of the new sales and what kind of success that you guys experience in selling the service in your existing account base?

It is still very early, we have not seen much of that.

Most of the shipments and most of that was our MG's next generation future pack free version, which actually commenced shipment only in the last week of the quarter.

Even though, the software was available, before that most customers expected these as part of the [INAUDIBLE] which is the major version of that, so we did not have much contribution yet and we are working hard to elevate the level of sales there and we are seeing a high level of interests.

But it is still very early on and I think it will be another six months before it will have a significant contribution to our numbers.

Any million dollar deals in the quarter?

Yeah, actually Jerry if you want to look to that?

Yes, one of it is going to be announced in press release.

We are working with the customers right now.

This is a very-very nice worldwide transaction for a very large deployment that is going to go out in the press release in a couple of days.

We do not have plan of mentioning out the name, but you will see that very soon.

Thanks.

Thank you, our next question is coming from [INAUDIBLE] of J.P. Morgan.

Please go ahead with your questions.

Hi guys.

I would like to go back to gross margin question in a different way.

Was there any change in the gross margins on the product revenue line in the quarter?

We do not have any expenses in the gross margin associated with the products.

The only thing today, which we have is product related is that very small number of [INAUDIBLE] solution what we sell [INAUDIBLE] which are now moving to hardware partners.

Our product sales generally do not have any significant or even at all royalty component or things like that.

Even our own technology or fixed cost, which we pay to our technology vendors, there is not much viable there.

I think actually people are much concerned with the bump-umping cost as much as trying to get a hand on, was there actually a pricing issue that may cause a change in gross margins?

No, absolutely no, Jerry referred to that.

We have not seen any price changes in any of these segments.

Okay and then on the servicing subscription line, is there any chance that, as we saw that the trend in product revenue, would the servicing subscription line come near to that 1 or 2 quarters later, or is there stuff in that line that could continue us a able trend from here?

We hope that it will continue and grow.

Actually the services subscription, the lot of it goes to the install base.

The install base is much up this quarter, obviously that depends where the economy is.

The economy picks up and if IT spending is higher, I think we will see a big [INAUDIBLE] aspect, if the economy goes out, I think even the [INAUDIBLE] customers should renew licenses.

We have the pretty good renewal rate and actually we have some of this is picking up.

Everything will be reflected there.

If you still look positive about the future market, I think we should have the positive trends there.

Okay thank you.

You are welcome.

Thank you.

Our next question is coming from Todd Raker from Credit Suisse First Boston.

Please go ahead with your question.

Yes.

Very quickly Eyal.

First could you give is the function of break down by head count, your sales and marketing versus R&D versus GNA?

I think we have broke that update down, but by and large, about 360 people in our sales organization, about 220 in our R&D, and about 200 in our technical support organization and the rest are across the board of functions, marketing, GNA and others.

Okay, and I am just following up Jerry, you talked about the big deals being competitive.

You guys continue to say that you have not seen any price degradation.

You have not seen price competition of many of your competitors?

Well, price is absolutely a component, but we find most of them and it was true in this quarter Todd, we really focused on functions, features, capabilities, management, total cost of ownership, performance, price performance, and we came out very well there.

We did not give any extra ordinary kind of discounts to win the business because it is not just price and the low price wins.

There are significant differences between us and competitors especially in deal of very-very large customers.

Not that we have won everyone, but I think we did very well this quarter and I think there was some significant transactions out there that we happened to product which was very nice.

But it was not because of price.

Although as you saw with the [INAUDIBLE] group, we have the best price performance alternative in the market.

I know not everybody understands that, but absolutely factual.

That is not a concern for us.

We have tremendous alternatives, a variety of alternatives that are out there, at many different price points and performance points.

We do and can win on our price performance in the market place, but it is primarily about security, manageability, total cost of ownership, where we think we came in very strong.

I do encourage many of you to go to our web site and read the [INAUDIBLE] group reports because I think it provides very comprehensive set of information.

It obviously covers only one sector of the market, but this covered the swift part of the market, enterprise, high performance, and gateway.

[INAUDIBLE] were a lot of the competition on what the sort of general purpose enterprise solution looks like.

I think it is a worthwhile reading.

That report is available on our web site on the main page and look at it.

One more quick followup question.

You got to talk about the none of the big deals and deferred revenues with revenue sequentially declining.

What is driving the consistent strength in deferred revenue then?

Subscription and support.

Subscription renewals and there is support technical revenues.

Okay.

Great.

Thanks.

Thank you.

Our next question is coming from Walter Prichard of [INAUDIBLE].

Please go ahead with your question.

Hi, just one question.

If you could talk about the Firewall-1, what is going on there, are you seeing customers want to buy that product about a year ago and now buy it.

If you could also may comment on the kind of the penetration where the product was in , few hundred thousands or so customers.

I said during my comments that we have been seeing success in the enterprise space.

We came out with some lower end models, and they have been very-very successful.

We saw an accelerating growth rate again this quarter.

If the coming management infrastructure of choice for large scale enterprise, it is not down into the medium size or into the low end of the enterprise space.

But the high end global customers that we have, they were deploying more Firewall and VPN technologies, it is gaining great acceptance.

So we continue to see an accelerating growth rate.

We have really done very well and we will get the service provider market very well saturated with many of the many-many provider-1 systems installed and the same thing has happened now in the enterprise space.

We think we will see continued progress because of the strength and the capability of what their product is in absolute terms as well as relative given the competitors alternative.

Okay just a followup on that relative to the $60m in license revenue in the quarter, any details on how much provider-1 and service associated products contribute to that?

$4m to $5m.

I think what may be seeing as a general market, two major drivers on large deals that we have seen, one is the large scale VPN deployment in dozens and hundreds and sometimes, even thousands of gateways.

The other one that we see a lot is the security infrastructure setup or basically reorganizing security infrastructures.

Companies over the years acquired dozens and hundreds of Firewall's and they now want to organize them, make sure that they have consistent policy that they can manage well in the cost effective way and many of these companies have large scale projects of deploying provider-1 and using [INAUDIBLE] infrastructure.

Let us say we will see a lot of deals like that in the several of the sectors, the financial sector is one of them, that we see a lot of attraction for those deals.

These are customers that are trying to basically reorganize and get better operational cost in their existing security infrastructure and with the great strength that we have there.

Thank you.

Our next question is coming from Robert _____ of AG Edward.

Please go ahead with your question.

Good afternoon everybody.

Jerry I was wondering if you can give us a little insight into the large [INAUDIBLE] home solution, is that 18,000 units that I believe over three years, and then may be if you can comment on how much of that was recognized in this quarter versus next quarter?

And then I would like to see if you could touch a little bit on your partnerships with [INAUDIBLE] with you at the low end and how was that going into the retail channel.

And then may be a little bit may be you at the high end and may be described that architecture please?

Okay on 18,000 units order, very few of them.

I think probably 40 to 50 units were done this quarter.

It was a long process with a number of competitors went down to a short list went through an evaluation process, went to some pilots, and were awarded to us through a number of partners.

They started the initial deployment.

So there is a very little revenue out of that, it was just, we have been selected as the vendor with the product and solutions to deploy otherwise the 18,000 different offices that they have and are going to put a Firewall and VPN solution.

Should we think about that has been rolled out [INAUDIBLE] over the next three years or how do you see that kind of rolling out?

I wish I knew the details on that and I do not, but I am sure there is going to be a slow ramp and then pick up probably in the next six months and that is what I understand but I am not closing up to this specific details to really give you some insight into that on high level transactions.

What was your second part of your question?

I know it was introduced into price electronics, I was just wondering how that?

It is being introduced.

They are taking it through the retail channels, there is a lot of programs, training, and marketing to do so I do not know.

I have been asked, but I do not know how much fraction they have seen yet.

I think they are in the process of receiving all the different stories, training all the given people, putting programs in place.

I know they are very excited about it.

We have our team who are working with them is really nice long term opportunity, but at the very beginning of that deployment.

By the way one breakthrough in that industry is that to Toshiba says that a consumer security appliance that was announced, it was actually cable model which was announced just a few days ago.

I think once that it hit the stores, that is a very attractive device, wireless line, cable modem, our security, all embedded in one box and I think lot of people is going to go for the cable operators.

I also think that Toshiba does plan to have some of it in retail stores.

Okay.

May be, at the high end could you talk a little bit about, I understand that, processor or architecture?

I can not go into the details about the architecture, but I know it is a product that holds great promise from the performance stand point, price performance stand point, we think it is a very nice addition.

I believe they either have just under a roof start shipping the appliance to market, but it is the one that has lot of people very excited in the early stages.

We do not have the number of just tremendous high end solutions, with Nokia, Nortel, Proxim, and [INAUDIBLE] will be joining them in the market segment, secured by Check Point device.

great.

Thank you.

Thank you.

Our next question is coming from Chris Russ of Wachovia securities.

Please go ahead with your question.

Yeah Hi.

I just wanted to explode this issue of gateway installations increasing by 10% sequentially to 247,000 up from 236,000 last quarter yet, license revenue still declining quarter to quarter which again suggest that the revenue yield per gateway or the unit revenue is still declining.

You are saying that there is no discounting going on.

How would you explain that is it just a mixed shift with a low end, why is that the ASP per gateway is declining?

The biggest increase is from the [INAUDIBLE] product [INAUDIBLE] it is really a order of magnitude difference. [INAUDIBLE] solution is under [INAUDIBLE] and the regular VPN and Firewall-1 gateway that we have is few thousand dollars, typically revenue to Check Point.

That is a huge difference.

The biggest pickup is on the [INAUDIBLE] solution with large deployments.

We have pretty good ASPs, but also keep in mind that large deployments on the high end most of the small gateways also have multiple models with our lower cost, not necessarily more discounted but just the lower end regional branch office modules.

So this will explain that.

It is issue of mix only, Chris.

Okay.

The revenue guidelines of the fourth quarter, I guess $100m to $108 m, may be you take the mid point of $104m that is similar to what you did this quarter revenue and yet EPS is dropping to $0.23 to $0.25 cents, what expenses are you ticking off, is that sales or marketing, is there anything unusual going on there.

Yeah, I think given the further [INAUDIBLE] for, we expect our sales and marketing expenses to pick up a little bit and that is the results, very simple.

Okay, finally on I heard the bear sign is getting out of the security that you were selling business, I guess a large resell at Check Point, any issue there or you expect that other resellers will avoid or you may take some of the business direct?

Let me explain in two ways.

One they were our partners in three different ways, through the man and security business, through security consulting factors, and through the third party resale.

They are going to continue and reinforce the partnership from both the man security services which they are staffing up or beefing up as well as security consulting.

They did stop the third party resale aspect.

We had more partners moving to every situation and every city around the country.

They pick up any slack that there might have been between installed customers and prospects that we do not expect any watch or slip into decline, associated with that.

There are lot of partners out there and they are very quick to, [INAUDIBLE] very good about turning moreover.

They work with us immediately they give us list of every single customer they have in every city, every prospect, type of pipeline from the third party resell business that has all been turned down over to the existing partners who are capable of building capacity in a particular market to address this.

They are really very good about this.

They really did a nice job.

Okay.

Thanks.

Thank you.

Our next question is coming Martin [INAUDIBLE] of CAIB Investment Bank.

Please go ahead with your question.

Good afternoon gentleman.

I was wondering may be I could have answered my question, the business [INAUDIBLE] with the government and the finance, could you [INAUDIBLE] data.

I know that you really provided break down before, but may be I do not know you if you could?

We have talked about them, and in fact, our two largest sectors today, both are round or slightly above 10% of our total sales commodity to one of those two sectors.

I understand.

Could I believe all the other question that I had before had been answered.

Thank you very much and good luck going forward.

Thank you.

You are welcome Martin.

Thank you.

Our next question is coming from Gary Becker of Kaufman Brothers.

Please go ahead with your question.

Hi guys.

I think most of mine have been answered as well.

Just going back to [INAUDIBLE].

I was just wondering that if you could go into the timing of that a little bit.

When did it become effective and if you expect any sort of the transition period related to that?

Thanks.

Yeah, it happened a week ago, in fact a week ago, today.

We attracted the management prior to that so we had transition plan and game plan in place and it has been going on ever since then.

It continues to get transferred, by not communicating to the customers, we have been working with them.

We have been bringing other resellers to pick up both the customers as well as prospect, so I think that is well on hand and I think over this last 5 days.

I think it is probably executed now, probably with just few minor exceptions and now continue to stay focussed on it until they are all transitions.

In fact we have got lot of interest in these are customers as well for other technologies and products and so I guess they are very good in working with the entire transitions.

Okay.

Thanks guys.

Thank you.

Our next question is coming from Nixon [INAUDIBLE] of Freidman Billing.

Please go ahead with your question.

Hi guys.

Allow me just to [INAUDIBLE] one more time please.

You were talking about 100 to 108 for next quarter, is that just normal seasonality for December quarter would indicate several this time., quite a few actually higher that the September quarter.

Does this indicate that we are seeing things deteriorating [INAUDIBLE] that the in the view that there the situation is actually getting substantially worse?

I [INAUDIBLE] you are right and I think there was a lot of potential of everything what you are saying in terms of what we are trying in the current economy.

They consider to balance between some upside opportunities and the general market trends that we are seeing and we are absolutely hope that you are right.

Can you give us an update on how you are seeing longer term operating margins, where do you expect it is going to?

I do not think it will look at the operating margin at the target what rather is a result of how business grows.

We will see a quick jumps in revenue, the operating margin will improve.

We will see things stable or growing more slowly, which [INAUDIBLE] will grow slowly and I again will see gross margin remaining at current level growing to more solid 50% growth operating margins which I think where we , right now it is a reasonable growth for the foreseeable future and if the revenues go down then operating margins will be worse than that.

I hope that this will not happen.

The main things to remember is that most of our expenses are pretty stable and fixed and depends on the head count and then it will be a question of how quickly the sales are coming and how much we invest in the future.

I think generally the good range for the next six months, nine months going to be between 60% to [INAUDIBLE].

Thank you very much Gil.

Thank you.

Our next question is coming from Rob Owens of Pacific Crest securities.

Please go ahead with your question.

Actually this is Evit Wilson on behalf of Rob.

Could you speak to any attraction that you gained in the quarter in the wireless LAN market with your [INAUDIBLE] product in line?

I think you could see lot of interest in that.

We could offer customer several architecture in which we can architect our corporate network in such a way that enables them to use our existing VPN solution, our existing networks and basically get very low cost wireless LAN solutions from any vendor.

You see a lot of interest in that and I think we will see more and we do intend in the next six months to come up with a programs and packages that are dedicated purely to the wireless LAN environment and making these things very simple and easy to deploy.

It is clearly an area of a growth and area of opportunity.

Secondly, I thank you to talk a little more about the DSO please.

Although it was in the expected range, it had seems to be fluctuating, could you tell us what the phenomenon is driving the difference in the [INAUDIBLE] DSO going from quarter to quarter?

Yeah, first of all our quarter pure number we said our DSO range is anywhere between 55-65 days.

It is there, even in the lower part of that range.

It fluctuates because our collections and revenues do not always correspond and we expect it to continue to fluctuate 2,3,4 days from quarter to quarter, there is nothing wrong with that.

I think this is a very good number and we are watching it very-very closely and carefully.

Thank you very much.

You are welcome.

Thank you for showing kind for one last question.

Our last question today coming from Philip Frank.

Please go ahead with your question.

Yes I have a overall strategy question that I wanted to ask you.

Your strategy as I understand has been basically to build your business through partnering rather than through [INAUDIBLE] various services, IDS, [INAUDIBLE] ability , assessment and so on.

Do all companies though who take the exact [INAUDIBLE] and in fact are building business through or [INAUDIBLE] services such as Symentc.

This company that I just mentioned, had an excellent record over in the less number of quarters pursuing just that strategy.

I really just want you to elaborate upon your strategy given that company's example.

I think our strategy remains very well to meet with customers.

Customers are asking in large scale Firewall and VPN deployment and I think that goes with your answering.

Symentc is a great company, they have very impressive results, but Symentc has been a complete failure in the Firewall and the VPN stage.

Several years ago, Symentc bodes a $100m Firewall business, they turned that into something with $10m, from $100m in the industry growth and falls.

I do not think that any other company in the market place.

Network associates is another great company and has great results in their core business of selling anti-virus software and last year decided to get out the Firewall and VPN stage and just some business away and we are working very well with them today.

I think between perception and reality is where the big distance.

I think our strategy works very-very well and help to work a very well in the last few years.

Let us move forward, keep watching what are the market trends with customers wants.

I think today allowing customers to have centralized management by Check Point management consult, allowing them to scale the firewall and VPN in very large ways, allowing the integration through the OPSEC program that we have with 300 partners.

Which provides all add-on technologies, that ways Symentec is a wonderful partner and very good partner there and I think that is our strategy to fulfill customer needs and where [INAUDIBLE] we see customer needs these days.

So can I take that you do not see Symentec in the market place as being significantly [INAUDIBLE] in the VPN area?

In the VPN area, we do not see at all

We see them as a very good partner, not a competitor.

Not really they are very good partner a lot of, you can analyze the amount of revenue they do in our sector and it is very-very small and it is not with the growth that it is coming from.

You look at their numbers.

Thanks for that clarification.

Okay I would like to thank you all for participating in our conference call and thank you for your questions.

If you want to peak to the management or to our investor relations department, following this call please call investor relations in our Redwood City California Office at area code 650-628-2050.

I will look forward to talk to you again in our next earning call.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.