Check Point Software Technologies Ltd (CHKP) 2002 Q4 法說會逐字稿

Good evening and welcome to the Check Point fourth quarter and fiscal year-end 2002 financial results teleconference. At this time all participants have been placed on a listen-only mode and the floor will be opened for questions following the presentation. If at any point you have a question, please press the numbers 1 followed by 4 on your touch tone phone. I would now like to turn the floor over to your host Ms. Janeen Sinelli Director of Investor Relations.

Good afternoon and thank you for joining us to discuss the fourth quarter and fiscal year. As a reminder this call is being webcast live from our web site and recorded. to access the live webcast and replay information, please visit the company's web site at www.checkpoint.com/ir. The replay will be available through February 5th. If you like to reach us 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'd like to read the following disclaimer. During the course of the call the company will make certain forward-looking statements concerning trends during the fourth* quarter and revenue and EPS for the future. Other statements which may be made in response to questions which refer to our belief, 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 in our 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. And now I'd like to turn the call over to A L Desheh CFO.

Thank you and good afternoon, everyone. Hopefully you all had a chance to review the repress release and financial results. Fiscal year-ended December 31st, 2002 came in with revenues of $427 million and net income of $255 million or $1 per share diluted. The year-ended with an upward Q4* trend which I will now spend some time discussing. The fourth quarter was strong resulting in revenues of $110.3 million, a sequential increase of 6 percent. Deferred revenues increased by $4.6 million this quarter to $99. 2* million in total as a result of continued strong subscription and upward business.Net income was $64* and a half million dollars, or 26 cents per share, there was an increase of 4# percent over the third quarter of 2002. During the fourth quarter the company generated net cash flow of $74 million, bringing total net cash flow for the year to $286 million. Total cash and interest bearing investments as of December 31st, 2002 was over $1.3 billion. We have made a few additions to the financial statement this quarter. You may have noted that for the first time we published a cash flow statement along with the press release.

We have also provided revenue detail on the income statement. We believe this will offer the investment community increased visibility into our business on a regular basis. For the fourth quarter cost of revenues and operating expenses were $44.1 million dollars, an increase of $2.6 million* over the third quarter, mainly in sales and marketing. --- our head count now stands at 1,203 employees, relatively flat from the previous quarter. Now let's look at some additional financial metrics for this quarter.[inaudible] revenues were up 8 percent to $65 and a half million dollars, amounting to 59 percent of total revenues. Subscription and upgrades were $35.3 million or 32 percent of total revenues, and services were $9 and a half million dollars or 9 percent of total revenue. Accounts receivable were 73.2 million and DSOs, day sales outstanding were 57 days this quarter. Income tax rate increased to 18 percent from 16 percent in the third quarter, in line with our approved enterprise plan. Our total VPN, FireWall and safe head gateway installation now stand at 264,000, 104,000 are FireWall, 140,000 VPN, and 20,000 Safe@ Products. We are pleased with our operating margin which was 60 percent in Q4, and in all of 2002.Well, this summarizes the financial results. I'd now like to turn the call over to Jerry. Jerry?

Thank you, I'll. Hello, everyone. This has been a unique year for Check Point, one where we made significant progress toward our future success, yet one where the markets are reduced IP spending invisibility. In spite of this, Check Point continued to generate strong earnings and build for the future. From a sales perspective, we were pleased to see an improvement in the business in Q4.

We closed a larger number of deals for larger dollar amounts and saw overall strength around the world for Check Point products with particular strength in Europe. Geographically the Americas contributed 42 percent, Europe 44 percent, and Asia Pacific and Japan 14 percent of total revenues for the quarter. U.S. business was slightly affected by the continued weakness in the telecommunications sector, but the enterprise sector showed some very nice strength this quarter. With a big increase overall and especially with large accounts for high performance solutions. We had a number of major wins this quarter. They came from all geographic areas and across all sectors, including our two strongest, financial and government. We are very proud that 95 percent of the world's largest financial institutions are using Check Point as a provider for their global network security infrastructure. We also added new fortune 100 companies to our growing customer list, making our total coverage now 97 of the top 100. In addition, we made significant progress with some of the world's largest tellcos (ph) this quarter with our newest version of our virtualized* FireWall-1 and VPN-1 software.

We also made headway with our small business initiative. If you recall, at the beginning of the year we set a goal to sell 10,000 Safe@ copies during 2002. In fact, we finished the year with over 20,000 copies shipped as Eyal just mentioned and over 8,000 during the fourth quarter alone. This has allowed us to open up new distribution capacity in the U.S., southern Europe, Japan and China, securing the solution and address this new market segment. A large contributor to Check Point's success is our business model. Our security ecosystem that includes technology companies who are offset partners, both platform and application partners, and our channel partners. This ecosystem is unique and brings great value to our customers. One significant benefit is the research and development investment being made by Check Point and our partners. This combined expenditure will ensure we continue to bring out market leading solutions that secure the networks of both public and private enterprises of all sizes for many years to come.

When you analyze the amount of money Check Point invests on security technology, plus the investment the made by our family of platform partners on building a wide range of secure by Check Point appliances, and the investment made by those developing Lennox, Windows, Solaris (ph)*, AIX and HPUX, you realize that no other company is spending this amount of R&D dollars on building security solutions. And that doesn't take into [inaudible] made by our offset application partners which is also significant. It is important to understand this, because when you look at the benefit of this coalition of best of breed security companies in provide what has been deemed during the past two years to be the industry's best security sweep, you will see how our customers benefit. They can get an integrated suite of security products from a wide selection of companies which provides them the level of interoperability they desire as well as the lowest total cost of ownership, and most importantly, the best security. No other company can provide this level of security, manageability*, flexibility, and price performance* It is also important to note the success of our platform partners are experiencing by building secure by Check Point appliances.

During the quarter we saw reports published by IDC confirming our leadership position for software based solutions as well as hardware based solutions. And remember, since we pioneered the appliance base solution with Nokia six years ago, it should not be a surprise that we are the market leader in this market segment. During Q4, Check Point and its partners enjoyed another quarter of success in providing a wide range of high quality solutions addressing many different price and performance points better than any other alternatives available. In fact, our major partners all report that Q4 was a record setting quarter and they experienced a combined sequential increase in excess of $20 million in hardware revenue, demonstrating once again that we are still gaining market share in the segment for appliance safe solutions. I'd like to put some special emphasis on our channel partners. We've continued to strengthen our partnership with our key resellers and distributors.

Good evidence of that is the fact that our ten largest distributors increased their business with us this quarter by 25 percent sequentially and more than 15 percent compared to Q4 last year. As we look into 2003 we intend to continue to invest in our channel partners and provide them with the best security technology for their customer needs, for they, too, benefit from the Check Point eco- system. Not only do they have Check Point as the core VPN and FireWall technology, but they also are able to build a portfolio of products that are certified to be fully integrated in interoperable. This allows them to be a single point of contact and security expert for their customers, and also allows them to maximize their revenue opportunity while keeping their costs low. In other words, they have a real value add capability, a unique benefit we provide to our channel and the channel to the customers.

This past quarter demonstrated the continued demand for our FireWall and VPN technology. Not only are our customers still focused on securing the perimeter, but we also see good demand from companies securing the internal network and providing site to site connectivity in addition to the more traditional need providing remote access for telle commuters. Over time we will see these various demands continue to be present in our traditional enterprise market as well as the new markets we have begun to address this past year which Gil will touch on in his remarks. Overall, I am very pleased with what we accomplished this past quarter and our prospects for the future. That concludes my comments and I will now turn the call over to Gil for further discussion.

Thank you, Jerry, and hello, everyone. As Jerry indicates, Q4 was an exceptionally strong quarter. As evidenced by the increased revenues, increased deferred revenue and the large amount of [inaudible] we had in the quarter, some already reflected in the quarter the results and some which will be reflected in future quarters financially. In 2002 was introduced a number of exciting new technologies and products. I'd like to highlight just a few. New active defense security category which incorporates [inaudible] based attack blocking# intelligence [inaudible] of security attacks# and real time update of security policy handling both known and unknown attacks. The first Check Point product in this new category small defense and we've already seen strong customer interest. We’ve continued to* extend our [inaudible] technology with introduction of application intelligence. It enables in-depth security and inspection and protection for the most common protocol which is web services, [inaudible] application, instant messaging and D M.S. services. On the wireless infrastructure front we introduce the FireWall-1 G X the first solution to protect GPRS *two and a half generation in the future, 3 G wireless infrastructure from the [inaudible]. We introduced virtual [inaudible] systems security the V S X, the only one to be a multi platform to have multi platform support for virtual security system for both data centers, internet carriers and enterprisers virtual LAN environment*

Finally, we've continued to extend our performance with the Secure Excel* [inaudible] technology. Some of the benefits with this unique technology can be seen in the recent [inaudible] report . the report showed we cannot only out perform competing product by a big factor but we can also do that at a fraction of the cost. Looking ahead to 2003, together our technology appliance and particularly our channel partners, we will focus on specific market segments. Here are a few examples of our segments based plan for 2003.Small business market we will continue our winning strategy with the Safe@ solution leveraging local partners and global carriers to provide [inaudible] of enterprise right security. In the enterprise phase our core market we intend to increase our account presence and product for penetration. For example upgrade customers from our smart center management platform* to the Smart Center pro extended management. Lead with security innovation stretches Smart Defense, increase remote access and LAN penetration# with secure clients and grow the overall gateway account with our branch office solution.

In the high end customer segment we see a high level of activity for larger deal and [inaudible] around Check Point as a security platform. These activities are led by solutions such as our unique scalable management that provide a one family large branch office VPN solution and our new V S X security platform and many of our high end platform performance solution. Vertical markets just as the wireless carrier also continue to show good traction and great potential of our G S solutions [inaudible] for security. Finally, in the managed security provider segment, more focus will be given to make security available for all customer types, making Check Point the security dial tone [inaudible] with multi connectivity packages. In addition to that, we will also continue to execute on our open platform and appliance strategy. Customers are deploying about half of Check Point products open platform include Unix, Windows, and Linux and half on* appliances. For over 20 different Check Point appliance partners. We will continue to offer customers choice for deploying Check Point [inaudible]security solutions* for maximum flexibility. This includes flexibility and functionality and prize, performance vendor and the ability to transfer existing software for other platforms, upgrade and deploy security on wire devices and manage all that together. That is Check Point advantage and no one else is offering. For 2003 it is difficult to predict the economic environment. Having said that we believe our initiative will show improvement in next year's results. We expect the second half of 2003 to show double digit revenue growth over the second half of 2002. For the first quarter of 2003 we expect revenues of $104 to $106 million, and EPS of 24 to 25 cents per share. Both are increases from* current expectations. We believe the main reason for up side or down side to these numbers remain the globalize spending and micro economic environment. With that I want to thank all of you for your participation and I'd like to open the call for question and answer.

Thank you. The floor is now open for questions. If you do have a question, please press the numbers 1 followed by 4 on your touch tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Once again, that is 1 followed by 4 on your touch-tone phone at this time. Thank you. Our first question is coming from Robert Breza of A.G. Edwards. Please go ahead with your question.

Good afternoon, everybody. Congratulations on the quarter. I was would be --, Jerry, if you could touch a little bit on pricing? Listen to a couple other calls here, and it's been speculated the pricing environment over the next couple coming, you know, weeks or months may get much more competitive. One can understanding [inaudible] can you talk about that in terms of giving your guidance and also wondering if you could touch on what would it take as you look at Asia, you know, to have Asia become a higher percentage of your overall revenue growth?

First of all, Robert, we saw our ASPs go up this quarter. We continue to have very good demand, strengthen our pricing. We've got a value add solution that is not really competitive when our channel gets out with our customers and talks about the total solution out there and we contend with it very well. We don't see pricing pressure for the sake of pricing. Asia has always been a good market for us. We continue to do well. We think we will. We're just now in the process -- I think we've been a little bit behind there on the low end of initiating -- of having the same initiatives that we have in the rest of the world that will be going into place in 2003. Gil talked about the various market segments, I talked about opening up some brand-new distribution capability. I mentioned both Japan and China that I think will have -- will bring us very good success in those markets for the opportunities we have in this coming year, because we see them as good markets in those segments for the new products we're bringing out.

One other quick follow-up. I guess Jerry, or Gil, if you could touch on it. As you've seen the carrier space or the towkowe (ph) space start to revive, I'm kind of wondering as you talk to these customers, are you seeing more of a budget flush here in Q4 or should we expect that to kind of carry through next year?

Well, in the Q4 we had especially in the U.S. the carrier market was fairly weak, so we haven't seen there any budget flush. We've seen a nice demand on the enterprise side on the U.S. I tend to believe the enterprise -- the service provider market, the tellco (ph) market in U.S., to pretty much bottom down in Q4. We will see strength in future quarter. We won't say very large deal with tellco (ph). But normal flows were reflected in the Q4 results* in the U.S. They showed some opportunity for us moving forward.

Thanks.

Thank you. Our next question is coming from Steve Sigmund of RBC Capital Markets. Please go ahead with your question.

Thank you. Wondering if you could give us a little bit more color on appliance partners, what percent of the business represented Nokia this quarter, and also how you see some of the other high end appliance partners, Ala, (ph) cross beam, watch guard coming on line, how you're going to market there? Thanks.

Nokia still is a very large percent. They continue to execute very well in the market across most segments. Geographically they are just a great partner. I think they are probably at the 85, 90 percent of our revenue.

Appliance.

Appliance revenue, thank you. And continue very well. They have a large organization it’s an. excellent product. We continue to succeed together in the marketplace. I think Nortel* continues to do very well. Cross beam is getting real good traction. I think most of the rest of them are lower from a revenue standpoint. But as they continue to put forth plans, programs and execute, I think they will do well. As you know, we've announced some new partnerships towards the latter half of the year that I think will play a role next year. You talk about HP, Sun, Siemens*, NEC, IBM and geographical basis, have all just signed up toward the end of the third quarter, fourth quarter, Steve, that I think will also be very good plan partners for us going into 2003. So I think we're very well positioned from partners, appliances, a variety of solutions, different price points, market segments, and the whole channel distribution reseller capacity that it brings in selling Check Point security solutions.

If I could throw in a quick follow-up for Gil, it sounds like you're pleased with the earlier performance customer interest and Smart Defense. Based on that interest have you made any decisions in terms of expanding the management capabilities or the product features, I guess specifically intrusion detection you'll be offering? Thanks.

We like to say complementary to intrusion detection*. The way we see it, this is more strategic answer than just a direct product. The role of our product is to provide the highest level of security, the highest level of manageability. Intrusion detection products, I look at [inaudible]tools to the security of the network, and I look them as a very important category security and we like to keep it this way. We like to make sure that you can get the highest level of blocking of attacks# of identification of attacks as part of the FireWall VPN solution. Yet at the same time it’s completely fine to use another auditing* technology intrusion detection technology to make sure your metric is secure the place and have the right policy and the FireWall is performing well. Yes, we do intend to expand Smart Defense is doing and the active defense category, but I don't think we have any plans to compete with our intrusion detection partners.

Thank you.

Thank you. Our next question is coming from Todd D. Raker of Credit Suisse First Boston. Please go ahead with your question.

Hey, guys. I just with want to revisit guidance far a minute. I just want to make sure I heard correctly. For the full year you're seeing double digits, revenue growth?

For the second half of the year.

The second half.

Second half 2002 compared to second half 2003.

If you have to annualize where you think your revenues will come out for the full year?

I think it's pretty hard to predict the future, especially given the uncertainty today. We are extremely optimistic about opportunities, about the wins, about everything that we see, but we want to be honest. It's not fair to just say throw in the number and -- yes, we could throw in the number but I don't think it will be too meaningful.

Okay. and can you give us some insight the tax rate steps up a little bit to 18 %. What do you expect going forward on tax rate?

We've been talking about taxes for quite some time. Went up to [inaudible] probably we'll see something close to 20 percent in 2003, but not higher than that.

And going forward, if you look out in the '04, '05, do you expect it to continue to climb Eyal Desheh?

No, around 20 percent is probably the level again, given no changes in the tech environment that we don’t expect.

Okay. And last question for you guys. With $1.3 billion of cash on the balance sheet. Any plans to return it to shareholders, to use it from a strategic perspective??

We keep looking for those opportunities. So far we haven’t (inaudible). We will use the amount of money to compete very effect effectively in our marketplace.

How about stock buy backs or dividends, Gil?

We keep analyzing that. We may or maybe not decide that. There's nothing religious about doing or not doing that. So far we haven't seen the great reception to this thing, but we will keep looking into that.

Okay.

Very open to ideas. So far we haven't found that its the best thing to do.

No decision to do it.

Thanks, guys.

Thank you. Our next question is coming from Jordan Klein of UBS Warburg. Please go ahead with your question.

Hi, guys. Nice job. Jerry, before you've given in the past percentage of big deals as the total revenue, I think they were 15 percent in Q3. What were they this quarter?

I don't know, but I'll let Eyal answer. He's got the data here.

Sorry about that.

Hey, Jordan.

How are you doing?

Okay. The large deals, we categorize them over $50,000 per order [inaudible], per order. So orders over $50,000 are worth 20 percent of our business this quarter. Went up very nicely, I think it was 13 percent in Q3. So we did see some results from the efforts that have been done throughout the year, and we hope we'll see more of those in 2003.

Okay, great. And I really appreciate you guys being a little bit more open on some of the revenue and cash flow numbers. And I think it would also be helpful to get a sense of since your business is actually 50/50 open server versus appliance, to get a sense of maybe sequentially how those two businesses did. I mean, even if you don't break out specific numbers, can you give me an idea what, you know, the relative change in those two businesses was versus Q3?

Yes, it was very similar to Q3 in terms of percentages. of course the number was bigger, but percentages of the open platform versus appliances was very similar. That 50/50 we've seen in Q3 already.

The only thing to keep in mind here, we're very open about the data we have and that’s why you see us reporting that-- the customers are registering with us. Because they buy the same software [inaudible] they don’t buy separate ones for an appliance, or for an open server. We keep pretty good track of what people are doing with it, that's why for now dollar numbers associated with it is that clear or that simple. Jerry also noted in what he said that we've seen the reports that we are getting from our appliance partners show that they had a very, very nice increase in Q4 in [inaudible] revenue, much higher than $20 million for the hardware alone which shows the strength of our plan partner which I think is very good news.

So does that mean if you saw almost a six and a half million sequential increase in total revenue, that that increase was equally distributed from your open server, VPN FireWall product and the software that runs on the appliances or is that wrong?

It's the same software. It's the same software.

From selling our products, what you refer to is on top of that our appliance partner is selling the hardware part generated an increase of $20 million –

Over 20 million.

On top of what we have generated.

You understand that, right, Jordan?

Okay, I guess I was asking a different [inaudible].

What it means, Check Point, if you look it means in very simple terms ask the vendor [inaudible] Check Point solution grew by quarter more than $30 million. Putting it all together, 20 million for -- more than $20 million for the hardware part and look at our numbers, close to $7 million, more than 6, but I mean [inaudible].

Right. And then just a last question. Gil, you touched briefly on some deal that you got that definitely didn't close. You know, I think Jerry mentioned that last quarter, too, you were optimistic. Does that help you kind of with your guidance, even though it's a seasonally challenging quarter and off of a strong Q4, some of this business that, you know, essentially got commitments from customers but didn't recognize is that the right way to look at that for Q1 guidance?

It's a little bit –

Some of it's not in Q1, Jordan. A lot of it is going to be during the year of 2003. A lot of it is some significant wins we got out of the service provider space. They're going to be deploying technology during 2003. So it's a continuation we saw. I mean a lot of the stuff that we won earlier this year, we got more sizeable orders from those same customers during Q4, and we see that same thing happening in 2003. As we hit these architectural wins, these partnership wins and these very large institutions, I was very pleased with what we did in the U.S., as I said, with some very large customers for some very high performance machines. We found real strength in the U.S. market this quarter at that upper end and did very -- ourselves and our appliance partners did very well capturing the demand that we saw in the U.S. We also saw it in the -- big tellco’s I think we'll see in our revenues in 2003. So yes, it all helps. Yes, it's good. So we're pleased with it.

We like to stay conservative. We are definitely starting this quarter with slightly better visibility than we did last quarter.

Thank you. Our next question is coming from Walter Pritchard of Soundview Technologies. Please go ahead with your question.

Hi, just one question on distributor concentration you mentioned. Can you just kind of walk us through more specifics there and how or what if any impact that might have had on numbers?

I'm not exactly sure what you're looking for Walter. On our 10 largest distributors on a worldwide basis they increased 25 percent sequentially. Our big partners did very, very well.

The partners that are committed to Check Point, partners invested in Check Point they –

They had a very good quarter.

Doing extremely well. Always, by the way, always 10 partners still amount to less than 50# percent of our revenue. Only one of them is more than 10 percent [ --] and most of them are less than 5 percent of our revenues. We are not really* dependency of any one big distributor. As a group they did very well.

The largest ones that are really committed to Check Point are [inaudible] out there doing a good job of marketing training generating developing demand, etc. They did very well.

Gotcha. Okay. Thanks a lot.

Thank you. Our next question is coming from Dan Harverd of HSBC. Please go ahead with your question.

Hi, good afternoon and well done on the results. When you're talking about the Q4 revenue that* some of your hardware partners out of the* 20 million, can you give an indication of what that total revenue was during the quarter?

Again, that's revenue wasn't ours. It was theirs.

Yeah.

So I don't know if we can –

We're not at liberty to give their numbers out.

The increment is the increment. I don’t think that we are allowed to provide that information.

Okay. I just want to go back to the dividend issue that was discussed earlier. When is this issue being analyzed, as Gil said, what has been the main reason for the opposition* at this stage to be distributing this dividend?* ---

First is what we think we might need in the future for strategic purposes. and second is what we believe we are share holding. If you look at shareholder voted 90 percent against distributing the* dividend. Microsoft did a nice thing declaring the dividend, but the market didn't necessarily -- reacted or appreciate it * in a positive mode. So while we have a very open approach to that, and even some bias to do things [inaudible]. We haven't seen a great enthusiasm in the marketplace [inaudible].

Okay. Thank you very much.

You're welcome, Dan.

Thank you. Our next question is coming from Gee Shank of Commerce Capital Markets. Please go ahead with your question.

I was wondering if you can comment on the growth in the number of deployments or orders in the fourth quarter.

Yeah. A number of orders increased a little over 10 percent this quarter. And relatively in line with what you've seen, gross revenue, deferred revenue. The average order size* went up a little bit. So we were very pleased to see that trend up.

Okay. I want to go back to the open server and appliance break down. Could you give the break down for new customers? In other words, what percentage of new customers are going with open servers and what percentage of new customers are going with appliances?

About 50/50. I mean, about 50 percent of new customers are going with open servers, about 50 are going with appliances. Nokia is about 40 percent of the overall market there. And the existing customers, in many cases upgrade their hardware and you have seen them on increasing hardware sales by our partners.

Okay. So the 50/50 is the same for new customers and existing customers?

Yep.

Okay. And lastly, I missed part of your guidance. Did you give guidance for the first half of '03?

We gave specific* guidance for the first quarter. $104 to $106 million revenue, 24 to 25 cents EPS, again slight increase from the current expectation. I don't think that we can be as accurate right now for Q2.

Any reason for the decline or your conservatism in this number?

I think a very high level of things in our world are that are still open that are hard to predict. I think Q4 was very strong seasonally. Q1 is usually very weak seasonally. So there is nothing special about that. It's just -- I mean I think the number that we have for Q1 is actually a nice number for seasonally weak quarter.

Okay. And for the second half of '03, you said you expect double digit revenue growth, specifically is that predicated on the improving environment or anything else in particular? ---

We clearly hope the environment will improve, but just based on where we see things right now. We see no reason in the second half of 2003 will not be better than 2002. So that's -- again, we're seeing activity of large deals. We're seeing the large long term projects and we're seeing a lot of things will bear fruit in second half of '03.

Okay. Thank you very much.

Thank you. Our next question is coming from Rob D. Owens of Pacific Crest. Please go ahead with your question.

Hi, guys. I got on the call late so I apologize if you went over this already. Could you give some color as to the geographical mix and specifically what you saw in the Americas? It looks kind of flat sequentially. Thanks.

We said 42 percent U.S., 44 percent Europe, 14 percent Asia.

Sure got those. and if I work the numbers looks like Americas was flat sequentially.

I'd have to look at that time that, too, Rob. What I saw may maybe not in the overall, we did large deals, large accounts, high performance solutions. We feel very good. We said there was some weakness in the service provider, tellco sector, though. So we saw the evidence in the enterprise in the high end stuff that felt very good. So we knew Europe was the strongest of the three, but generally we feel very good about the business. We have for the last two or three quarters in the U.S. So I can't speak to just sequentially, but I know for three quarters in a row now the U.S. has gotten stronger and better.

I think in terms of overall business the U.S. was stronger this quarter than previous. In terms of revenue because a lot of that is subscriptions and advertisement deals. In terms of revenues U.S. was little bit better, [inaudible], but by little bet. That was again very nice growth in the enterprise side and still decline and weakness on the tellco side.

And maybe a little color on what drove Europe so strong?

I don't know if there's any specific thing, other than we're just well positioned with good solutions. Got a lot of really good channel partners working over there. They were successful. Just a continuation. As we continue to sign up these appliance partners and address these different market segments and the broad range of who we have out there selling secured by Check Point solutions. And as I said there are some major guys that I think are going to position us very well for the long term. This Check Point eco system building strength and momentum. Maybe it's happening over there because of some of the regional partners that are over there. They're in place there that have helped us, but it's -- it's just continued to go well there.

Okay. Thanks, guys.

Thank you. Our next question is coming from Thomas P. Berquist of Goldman Sachs. Please go ahead with your question.

Hey, thanks just a couple follow-ups on the vertical industries. You mentioned tellco the strength of the enterprise. Can you talk about which vertical industries in particular*in the enterprise market did well, for example financials and whatever? And also if you could talk about the government sector a bit?

I said at a high level. I don't know what you want to get into. Both financial and government were strong for us this quarter. They have been our two largest sectors and they continue to do very well in both of them. That's why I mentioned we now secured 95 percent of the large of the financial institutions in the world, and 97 of the fortune 100 and we did very well in government. Around the world. Everybody asks us about the U.S. government we continue to do well with, but we do well with governments all over the world. We've been very successful. We're really the defacto* standard for those kind of entities looking for network security. But those sectors are both very strong for us this year in this quarter.

[inaudible] all those questions about federal spending in the U.S. in the December quarter, but you saw that as well?

We absolutely did, but remember, there's government -- we do business in 142 countries around the world right now. And governments of most of [inaudible], and not just the equivalent of Federal government, state, local, education. So it's a pretty big base of government customers that we have that doesn't rely just on the U.S. Federal government although we continue to win business and do well in the U.S. Federal government this quarter.

All right. And the question on currency, was there a currency impact on all the numbers this quarter?

Not really.

No.

We are practically a dollar based company.

Okay.

The only country that* we sell in local currency is Japan.

Okay, great. Thank you.

Thank you. Our next question is coming from Ed Maguire of Merrill Lynch. Please go ahead with your question.

Yes. I was wondering if you could address some of the progress you've made along the lines of your partnership with HP, and maybe some of the developments we might see in the next couple of quarters on the appliance side with them.

I can't speak in great detail, Ed. I can* at an executive level. At a macro level HP is very, very committed to Check Point as their security partner both from their enterprise sales group as well as their consulting group. And now it's a matter of execution and executing means getting out to each of the regional offices, the area offices, the country offices working with each one of their channel partners putting together marketing materials, brochures, seminars, road shows, education, training them, getting their engineers certified to be Check Point, CCSE, security engineers*, and they're well on the way to doing that. There's a strong nucleus within HP. Obviously HP has a lot of other technologies, areas, products, solutions that they bring. So long term it's going to be up to them to decide how important security is. We know with the security people they think this is very important. It's a very important relationship. So I have expectations for HP and Sun# that they will be very good partners in other words for us long term bringing solutions to their customers by their server.

Great. If I could go back to the issue of the top 10 distributors, it seems that your largest distributors have performed disproportionately well, possibly at the expense of some of the smaller distributors. Could you maybe go into some of the factors that might be causing some of the smaller distributors not to contribute as much, and whether you have considered contracting your distribution network to eliminate some of the under performers?

Well, we always evaluate who is a partner, who is doing well, how are we doing are we growing together, successful together, committed together. I think this is not about people not performing. This is just about people that have stepped up, are committed, are doing what it takes to be successful. I think they are more of a model for all the rest of our partners as to what it takes to be successful and the fact that they can be successful in this market. So, it was more a point of positive focus on those that are doing it right as a model for the rest of them to say, hey, this really is an area for investment. This really is an area we should focus on. We should mimic it in running seminars and doing direct mails and doing web casts and a tracking more resellers. That's my view anyway at this point.

To propose to the customer the better solution to buy and propose to the customer Smart Center over Smart Center, they'll buy Smart Center pro. It’s worth the price it’s very easy to see for the customer* the right focus [inaudible] take the customer and offer* for them to take secure clients that's additional revenue opportunity and distributors that understood that are seeing bigger product mix, more products they sell and bigger wins that they have. [inaudible].

I talked about something in my remarks about the Check Point security suite. It is the best solution for those that want to put a multi product, full network security infrastructure in place, and I think that's one of the things you find with our more successful partners is the fact that they fully embraced the Check Point business model about choice and OPSEC and all the solutions that we bring. And that's they're just a point of reference as to what it takes to be successful.

Thank you.

Thank you. Our next question is coming from Howard Smith of First Analysis. Please go ahead with your question.

Sure. I just wanted to probe a little more on the G X products for the wireless industry. You talked about the Safe@Home and how that exceeded expectations. The other area that was kind of new was this G X, and the outlook as you go into 2003 for some pretty high dollar ticket orders.

Howard I'll answer first, and maybe Gil wants to add as well. I am extremely pleased with G X. Now, we talked* at the investor day at the beginning of this year that it was a finite market, but we've done very well. We're just really pleased with the success. We had a number of significant wins in Q4 again, around the world, Eastern Europe and the Asian marketplace, in the U.S. as well. And I think we're going to -- we're the clear leader in supplying security to the wireless infrastructure.

Are those small, small orders today that just are going to grow with deployment or –

No, every one is an initial order. They start -- they'll all grow and we have many, many customers now that have initial products installed.

We're still speaking about dozens or I mean small two digit number of customers right now, but each customer is a big customer. Each initial order is on the average $100,000 or more. They all plan to do more and there are many more like them. Our estimate now based on the competitive environment of what's been [inaudible] 90 percent market share or more right now. We're doing very, very well last year in this market.

Thank you.

Thank you. We're showing time for one last question. Our last question is coming from Stephen Mahedy of Salomon Smith Barney.

Thank you. For starters, on the slightly better visibility alluded to Gil on some other comments, I'm wondering if you have the opportunity to go back to the 4 Q results and try to separate seasonality versus pick up in demand. Have you been able to look at how much of the new orders are coming from incremental buying inside existing customer or new capital projects from new customer?

I think it's both. But again, big part of the business is new projects from existing customers. Like Jerry said, 97 of the fortune 100 are already customers. So we don't expect the last three to provide us with the big increase in the business. On the other hand those which we did do in many cases with an existing customer but it's a completely new project, it's new level of business with that customer, [inaudible] they're both from Check Point products over the years and now they are standardizing on Check Point. The global platform, it's the only standard which they have. We've seen a lot of that. You can call it anyway you want, but it's good business and lot of it is new business.

Okay. Within the guidance you offered for the second half, you were very clear about the fact the visibility is still difficult there. But I'm wondering from a standpoint of margins if business does pick up a little bit or, in fact, kind of stay at its current pace would you expect margins to kind of hold where they are right now or is there? Other investing needs to be done in the business?

We always say current [inaudible]. We have the highest margins* -- I understand industrial company in the world. Operating margin as our ultimate goal. Ultimate goal is to grow the business. We don't see any new project we want to invest in. We do want to do more, but I think we'll always give and we are saying the past six years we expect the margins to go down. So far they haven't gone down for the past six years. So I want to be careful here not to put ourselves in some trap. We will invest more, but at the same time we don't see some big changes in the margin [inaudible].

Okay. And the final part of my question would be as it relates to the installations, both FireWall and VPN and total gateway. It looks like the best growth is coming out of the VPN portion of the business. Do you expect perhaps a reacceleration in FireWall or do you think just given the secular trends that VPN will continue to drive the growth?

We actually want all our customers to buy VPN. Keep in mind our VPN-1 product contains the FireWall product. VPN is combining the FireWall in it. Part of selling more is just selling to every single customer. the small premium you pay for VPN is worth it. Even if you don't need it now. the fact you actually see growth in Fire Wall just means that for some people that haven't even reached the stage or thinking about VPN, but this market is still showing some nice signs of growth. We like to have 100 percent of sales VPN.

It should be 100 percent FireWall VPN integrated sale long term for what we're bringing to market* and other deploying our technology.

Okay. Thank you.

Thank you. I would now like to turn the floor back over for any closing comments.

Okay. We'd like to thank everybody for your participation, for your good questions. If you want to speak to management or Investor Relations following this call please call our Investor Relations department at 650-628-2050. Again, phone number 650-628-2050 and we will be very happy to take your call and try to accommodate you. I will talk to all of you on our next earning call. Thank you very much.

Thank you. This does conclude today's teleconference. May disconnect your lines at this time and have a wonderful day.