Check Point Software Technologies Ltd (CHKP) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Check Point Software Technologies fourth-quarter and fiscal year end 2003 financial results conference call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to Ms. Janine Zanelli, Director of Investor Relations. Ma'am, the floor is yours.

Good morning and thank you for joining us to discuss our fourth-quarter and year end results. As a reminder this call is being web cast live from our website and is being recorded. To access the live web cast and replay information, please visit the Company's website at www.CheckPoint.com/IR. The replay will be available through Feb. 5th.

If you would 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 this call the Company will make certain forward-looking statements concerning our expectations for revenue and EPS in 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. Factors that could cause or contribute to such differences include, but are not limited to, the impact on revenues of economic and political uncertainties and weaknesses in various regions of the world, including the commencement or escalations of hostilities or acts of terrorism. The inclusion of network security functionality in third party hardware or system software. Any unforeseen development -- developmental or technological difficulties with regard to Check Point's products, changes in the competitive landscape including new competitors or the impact of competitive pricing and products, a shift in demand for products such as Check Point's, unknown factors affecting third parties with which Check Point has formed business alliances, timely availability and customer acceptance of Check Point's new and existing product and other factors and risks discussed in Check Point's report on form 20 F. for the year ended December 31st, 2002, which is on file with the SEC.

Check Point assumes no obligation to update information concerning its expectations. Thank you and I'll now turn the call over to Eyal Desheh, CFO.

Thank you very much, Janine. Good morning. Let me share with you the results of a very active year and an active quarter for Check Point. For the year ended December 31st, 2003, Check Point's revenues were $432.6 million with a net income of $243.9 million or 96 cents per share diluted.

We continued to generate strong cash flow. Our net cash flow for the year was $288 million in total cash and financial investments at year end were over 1.6 billion.

The fourth quarter of 2003 was our best quarter in two years, resulting in revenues of $115.3 million, a sequential increase of 8 percent. At the same time, deferred revenue increased by $6.8 million to 105.9 million. That income was $65.3 million or 20 cents -- 26 cents per share diluted, an increase of 13 percent in earnings per share over the previous quarter.

During the fourth-quarter the Company generated net cash flow of $72.6 million. For the fourth quarter, cost of sales and operating expenses were $46.4 million -- 2.2 million above Q3. The increase was mainly in sales and marketing expenses, resulting from lower marketing activities, high commission payments as a result of our strong sales, and the impact of the strong year.

Product revenues were up 17 percent, sequentially, to $63 million, accounting for 55 percent of total revenue. Subscription (ph) upgrades were $42.5 million or 37 percent of total revenues and services were 9.8 million or 8 percent of total revenue.

Accounts Receivable were $72.8 million and DSOs -- days sales outstandings -- were 54 days this quarter. Our income tax was 18 percent and operating margin was 60 percent.

I also like to take this opportunity to invite you all to our investment day which will be held on February 5th in New York from 8 AM to 2 PM. Check Point management, together with Gregor Freund (ph), CEO and co-founder of Zone Labs, will present to discuss our business opportunities and strategy as well as new products and technology. We will also hear from a few of our valued customers regarding Check Point solutions and actions.

If you have any questions about this event please contact our IR department and we hope to see you in New York and share some of the exciting things that are happening at Check Point.

Thank you for your time and I'll now turn the call over to Jerry.

Thank you, Eyal. Good morning and hello everyone. I also look forward to seeing many of you at our investor day. The Check Point team is optimistic about our future. Based personally on our new products and the opportunities they bring, markets we serve and meeting the changing needs for securities. These are just some of the reasons behind our enthusiasm and we will share these with you on February 5th in New York. We believe 2004 will be a good year for Check Point, as we execute on many of the initiatives already put in place.

Looking back at Q4 2003, our product revenues experienced a nice increase. Particularly, Check Point expressed (ph) for midsize businesses which we announced in Q3 and was the largest growth coming from Europe. We experienced strong sales in all verticals with government, financial, telecommunications, health care and retail being five of the better performing verticals this quarter.

In addition to the revenue increase we achieved this quarter for our software, we know from just our top few appliance partners that the revenue increase for the hardware portion of our combined solutions that they generated an increase in revenue of more than $50 million this quarter bringing the combined quarterly increase in excess of $25 million, which means we gained a market share in our core markets.

We again maintained our geographical balance with the Americas contributing 41 percent, Europe 44 percent, and Asia-Pacific and Japan 15 percent of total revenues for the fourth-quarter as our customers in all regions reacted positively to our new products and programs.

We also experienced good demands for the products we announced in Q4 that address the needs of small businesses with the new Safe@ solution and the remote offices and branch offices with the VPN (indiscernible) appliance.

Our partners report that they're seeing increased activity in these new market segments and are optimistic that they have a very viable Check Point solution to address the needs of their customers, especially with very large [indiscernible] VPN deployment which is exactly what the [indiscernible] family was developed to address.

Another program that is proving to be a success is our new enterprise-based support program. While it was initially announced to our partners and customers in April 2003, it did not become fully implemented in some of the regions of the world until November 2003 and was the primary reason behind the growth in deferred revenue.

EBS brings financial and business benefit to our customers by ensuring their entire installed base of product is covered by software subscriptions, providing them with the ability to continually upgrade their products with the latest versions at a very attractive cost of ownership. The full-scale rollout of this program in all of our regions will continue through the first-quarter of 2004.

As you all know, in Q4 we announced our vision in Road Map for bringing to market an expanded family of security solutions to address not only our traditional perimeter market but also two new segments -- Internal and Web security. The road map was very well received by our partners and customers and we have already begun executing on that vision.

Two days ago we announced InterSpect™, the world's first Internal Security Gateway™, designed specifically to meet the needs of internal network security to block the spread of worms and attacks inside the network and provide network zone some segmentation.

In addition as previously mentioned, we continued to expand the depth and breadth of our product lines to provide the highest level of perimeter security. The strategic importance of our next generation products -- NG (ph) -- continues to unfold as NG with Application Intelligence™ gained market acceptance. As you know, this was the first step in Check Point strategy to address the changing face of perimeter security by dressing the application layer in addition to the network layer for both access control and blocking attacks at the perimeter.

Even more recently, we announced three new products. Check Point Express VPN-1 Edge and Safe@ Office -- new solutions will make our market leading capabilities available to organizations of all sizes and -- for the protection of the expanding perimeter.

During the first half of 2004, we will introduce the industry's only unified solution for addressing today's Web access and Web protection challenges. This includes unified remote access by SSO VPN functionality, authentication in authorization, reduced sign on, and Check Point's leading application in network level security capabilities.

Overall, I'm very pleased with what we accomplished this past year and how we've taken positive steps to help drive revenue growth in 2004. This is a very exciting period for Check Point and a great time to be part of the Check Point family. Our product innovations and new solutions continue to position us as the innovation and technology leader in the Internet security space. That concludes my comments and I will now turn over the call to Gil for further discussion.

Thank you, Jerry. The strong performance delivered in the fourth-quarter resulted from a long list of activities and action taken during last year. During 2003, we entered the [indiscernible] designed to contribute to the Company's future growth and success. We've made an important technology breakthrough with our Application Intelligence technology, (indiscernible) a number of new products and announced an important acquisition.

As Jerry mentioned our expansion investment were [indiscernible] specific market segment but rather to a broad range including small, medium enterprise [indiscernible] and a major part of our strategy was the move to [indiscernible] perimeter and (indiscernible) securities. If you recall, we started talking about it back in July and now some more detailed roadmap in November and have already made two important steps in executing the strategy -- the position of [indiscernible] and the announcement of InterSpect™ family of internal security solutions. [HEAVY ACCENT] Acquisition of (indiscernible) strategy with Zone Labs (ph) integrity (indiscernible) will enable corporations to better secure their [indiscernible] part of the perimeter security. It will enable us to offer end to end solution by deploying the [indiscernible] clients on every computer on [indiscernible]. Future products will address the security [indiscernible] when using today's assembly VPN (ph) solution the client computer remains vulnerable and therefore creates a real risk of Trojan horses taking advantage of confidential information and attacking the corporate network later on.

This is a major drawback of existing solutions and our new technology will address this (indiscernible) a special [indiscernible]. Application Intelligence is gaining mind share and is already receiving great acceptance in the perimeter marketplace, something that our competition is rushing to imitate -- unfortunately without the security and the performance benefit that Check Point offers. InterSpect™ builds on that technology and takes it further to the inside of the network, presenting a new paradigm in thinking about securing multiple internal network segments, creating security zones and practically blocking the spread of worms inside the network. So with just these two examples you can see that this is an impressive level of activity in a short period and shows that [indiscernible] enthusiasm with which the Check Point team is executing to reach our expansion [indiscernible].

While it is too early to estimate the financial impact of our new products, we believe they will serve us well in the longer-term and in the short-term.

We will share more of our [indiscernible] projection at our February 5th investor day in New York and we are looking forward to seeing you there and for the first-quarter of 2004 our estimate this time will be on a pro forma basis and exclude the [indiscernible] effects of our Zone Labs acquisition which we are still assessing and are expected to be [indiscernible]. We also assume that the Zone Labs acquisition will close during the second half of February and based on that our current estimate [indiscernible] assume a healthy revenue in Q1 in the range of 110 to $114 (ph) million and an earning per share 22 to 24 cents.

That concludes my comments. Thank you, everyone, and I will open the call now for questions.

[Operator Instructions].

Steve Sigmond (ph) of RBC Capital Market.

Congratulations. Just a clarification, Gil, on the guidance -- you said 110 to 114, on the topline? And does that includes Zone Labs? Are you assuming basically about six weeks of Zone Labs revenue?

That includes a small portion of Zone Labs -- that includes somewhere between three to six weeks of revenue and at times we have to also remember that -- because of the accounting treatment of the third revenue we lose big parts of the first (indiscernible) quarter revenues which are coming from deferred revenues and under the revenue [indiscernible] we won't be able to recognize in the first few quarters until we accumulate again on Check Point so the Zone Labs effect is not going to be huge in Q1 but yet, it does assume it will include with again three -- four to six weeks [indiscernible] revenue.

Thanks for the clarification and just a quick question on customer uptick of Smart Defense -- you've been out in the market now for couple of quarters with that product. Can you give us any stats on that? Thanks?

Yes, that actually has being going great -- the SmartDefense system. I think we doubled the SmartDefense subscriptions from Q3 to Q4 and, Eyal, do we have more detail which we can share at this point.

No, just reminder that included in our subscription [indiscernible] and is always the third or fourth quarter so a lot of the [indiscernible] coming now appears in the program (ph).

Walter Pritchard of SoundView Technology Group.

I just wanted to know, relative to the geographic mix that you expect in Q1 I noticed this quarter in Europe was up while the U.S. was relatively flat. Is that a trend you expect to continue into next quarter? If you could clarify what the contribution is you do expect from Zone with that four to six weeks just so we have some sort of (inaudible)[indiscernible].

First, I want to say this quarter U.S. was great -- both U.S. and Europe were very strong -- I think Europe was slightly stronger but from the overall numbers and every measurement that we have received the U.S. also did very very well last quarter. As for the numbers of Zone Labs, we don't have again the final numbers [indiscernible] estimated for Zone Labs in Q1 based on time period and the deferred revenues (indiscernible) but several small number of millions of dollars -- a very small number in that respect and [indiscernible] last part of the question?

Just wanted to get clarification on the geography [indiscernible] booking basis the U.S. was stronger because the revenue breakout does show the U.S. flat unless I am doing the calculation wrong.

[indiscernible] do with the deferred revenue [indiscernible] [indiscernible] again, the U.S. was strong the (indiscernible) we saw last quarter was very much evidenced in both the U.S. and Europe -- and Europe was slightly better than the U.S. maybe because it also came from a weaker quarter in Q3 and maybe some of the [indiscernible] U.S. had a wonderful quarter in Q4.

It's in both booking and deferred.

Sarah Friar of Goldman Sachs.

So, could you just give us a little bit more granularity on the appliance side of your business in particular, what was the OpenServer vs. the appliance split? What was [indiscernible] as a percentage of total revenue? And then I wonder if you could maybe comment on your relationship with Dell (ph)? We've been hearing a lot more feedback of that, in that from your channels?

We don't have the final breakdown of [indiscernible] platforms. I can tell you [TROUBLE -- HEAVY ACCENT] if it seems to be relatively stable it seems that they also (indiscernible) Nokia also did very well in the marketplace last quarter [indiscernible] we can share those results but I think the mixture remained pretty stable. I think Nokia was 40 something percent of the platforms that we sell. Regarding Target relationship with Dell, Dell became a Check Point partner now when we are in some new products which we're launching -- I don't know in the future if will be stronger partner or not but also like to grow partnership with [indiscernible] major manufacturer major [indiscernible] manufacturing [indiscernible].

Robert Breza of A.G. Edwards.

Eyal, I was wondering if you would clarify a housekeeping item? When you look at the euro and the dollar exchange, what was the foreign exchange benefit on the top and bottom lines?

There was an impact on the topline Europe [indiscernible] expenses [indiscernible] minor [indiscernible] on a bottom line but short of $1 million for the quarter.

Can you also tell us approximately how many shares you bought back obviously the outstanding shares dropped, wondering if you can help us understand that and maybe give us some kind of indication?

Thanks for asking. What we would tell you that shortly after our buyback program where we [indiscernible] announced we became engaged with the discussions of acquisition of Zone Labs which prevented us from buying back shares and will prevent us from buying back shares of Dell after the closing of this transaction.

A quick question for Jerry. I was wondering if you could kind of touch on the SSL VPN functionality that you talked about in your remarks? Maybe clarify, is that going to be integrated into the traditional Check Point product line? Or how should we think about that -- will that be a separate SKU? Any clarification on that would be great?

Yes, we already have SSL VPN and have for two years in our core (indiscernible) VPN-1 product. We're talking about here (indiscernible) roadmap in which you'll see announced yes, in the first-half 2004 is a brand new Web security product. And we'll have SSL-VPN functionality but it will be more then just a SSL VPN solution as we said in our roadmap and I highlighted in my comments and will probably discuss a little bit more on February 5th with you, talking about the product in some more detail without actually announcing it, because we aren't ready to do that. But it will be a stand-alone product.

Ed McGwire (ph) of Merrill Lynch.

Could you speak about your plans for combining management capabilities for the Check Point and Zone Labs products and how that might play against Cisco's alliance with the antivirus vendors?

We have some level of integration with Zone Labs that I think is stronger than many other vendors that are claiming integration have. But in the future we will obviously offer a fully integrated management to be able to define policies for enterprise from one [indiscernible] the check -- the Zone Labs integrity, management software [indiscernible] Check Point's [indiscernible] management and customers will simply get -- will get integrated management capability for all of that. One think you have to remember is Zone Labs is (indiscernible) technologies that we call cooperative enforcement that allows a different product to act in conjunction with one another. For example that allows a Gateway to block the access for a computer that is not protected, protected by Zone Labs or not protected by an antivirus agent, and Zone Labs can detect and understand what's going on there so I think we will have -- so I think we will have a very strong integration there and finally and I think that's an important point to remember for [indiscernible] fighting to prove that they have Check Point has for more than six years [indiscernible]. With all the major antivirus vendors very well integrated work very well and with 300 -- with 300 members in the OPSEC -- I think every body in the industry tries to [indiscernible] some sort of level of integration 5 6 behind where we are to date.

Just a question about the InterSpect™ product line. I noticed you are moving increasingly into the appliance format. How should we think about the impact on margins going forward?

I mean, first, we already said, we said all the time that the value is in the software and the delivery platform and for every product there are different partners and different delivery platforms [indiscernible] with InterSpect™ we've chosen to bring it up and [indiscernible] we wanted to do it quickly and we realized that this is the fastest way to get to market and also because this product has to integrate right into the core of the network and this way, in a very short period of time we can grow the platform the networking connection, everything, right into the network. In the future there may be other partners that will inplement that software and we'll be very very happy with that. As far as the contribution to the margin all our products expected to be high margin products and basically the more we sell, the more we should earn, we hope so at least, that's what our plan is for building the business so I don't think [indiscernible] should have any significant impact to the overall operating margin at Check Point or something like that. The growth in the business, the investments in the business and the total revenues we [indiscernible] Check Point margin looking forward. [indiscernible] very fast you should expect market [indiscernible] in a reasonable way margins can go a little bit lower or stay relatively where they are, since they are extremely hard today I mean, we're not focusing on growing the margin as the target, focusing (indiscernible) revenue [indiscernible].

Todd Weller of Legg Mason.

Couple of questions. First on the InterSpect™ product -- how much of this is new technology vs. a repackaging or rebranding of some of your existing technology?

Let me say depending on the [indiscernible] very new technology and a very important one. The whole concept of getting into a network is our defining policy and just understanding the network segment. The whole thing is very very new. Also, with Application Intelligence™ this addresses the vulnerability of proactively of many of the internal (indiscernible) security -- that's another important element in that strategy. For example InterSpect™ understands protocol like SQL (ph) like the (indiscernible) of protocol which are the most important [indiscernible] environment and it's fairly unique in the marketplace. All our competitors [indiscernible] competitors that we have today (indiscernible) primary wants [indiscernible] don't do that. At this point and (indiscernible) have a product in this category but even if these products do partial functionality [indiscernible].

But going back to the [indiscernible] new paradigm in internal security we just [indiscernible] marketing (indiscernible) but also applies to the entire scope of management about the ability to plug-in security and security system into the network and within seconds or minutes having copied [indiscernible] without variable analysis or weeks of finetuning whatever the security [indiscernible] or it's the false [indiscernible] some device has created. So. This is the new technology -- it does leverage very very well inspect engine, the Application Intelligence™ which is new, the [indiscernible] technology that we have but there is a lot of new concepts, and new technologies [indiscernible].

With the continued rollout of your inner [indiscernible] program in the March quarter should we expect to have another positive impact [indiscernible] going into March?

I think we are -- guidance [indiscernible] has not changed, it's been fairly consistent for the last few quarters and [indiscernible] of $5 million and I think it should remain the same. We are very happy with [indiscernible] quarter, we were a bit ahead of our expected range. I think we're still within the range of + - $5 million but I think Q4 usually has higher percentage of renewals than any other quarter and I think that luckily, it worked well, and the deferred revenue went up more than our guidance. Q1 is usually the opposite so I don't see any -- I see mainly good things happening but don't expect too much because Q1 is a fairly, is a fairly weak quarter in terms of renewal at least historically.

Joseph Craigen of Needham & Company.

First of all just want to follow-up on the InterSpect™ product. I guess first of all if you could comment on the level of readiness in the channel and also just walk us through the education process and also the rollout plan for InterSpect™?

We've been doing a lot of work with the channel, you may have seen in the announcement where we said we already had 50 customers -- 5-0 customers -- that have had the product installed anywhere from three to four to five months in what we call our early access program. And now not only have the customers been involved but also channel partners have been involved in each one and we've done a significant amount of training so far. We will continue to do that. As we start shipping out products -- (indiscernible) demo products, evaluation unit. We see -- it's interesting -- InterSpect™ was driven to some extent by our channel partners telling us what they wanted in addition to our traditional products to bring to their customers. The alternative solutions that they had in their product portfolio were not what they wanted, not what the customer needed and InterSpect™ is really evolved out of that need and requirements. So the channel is very excited about this. It's what they asked for. But, yes, it's going to take a quarter or two as we continue to educate, shift, deploy and grow with it because as with all products and this one will probably be no different. So good demand, good readiness with a lot of work to do and we are well underway of doing that, Joseph.

Generally your -- on the competitive landscape over the past quarter or two, you've seen a number of product refreshes, product introductions in the competition. Could you just touch on what you're seeing competitively seeing any one more, seeing any one less?

No, I haven't seen much change out there. Cisco is still the number one competitor because the name brand reputation and presence in the network sectors so they're the ones we see the most. There's a number of other competitors that are out there that continue to play in the space, approaching the market from a price aggressive standpoint but I have not seen a change. Like I said, we did very well this quarter and we will continue as we unfold new products, new technologies and new solutions for our partners and our customers so --

Katherine Egbert of C.E. Unterberg, Towbin.

Nice quarter. I just have one question which is how much of the revenue that is all of 2003 came from products that were introduced in 2003?

15 to 20 percent.

[indiscernible] (MULTIPLE SPEAKERS)

20 percent maybe closer to 25 percent in Q4 [indiscernible].

Todd Raker of Credit Suisse First Boston.

Good quarter. Two quick questions just housekeeping. Can you guys give us any indications in terms of large deals, the percentage of revenue, historically, give us that and, then, the number of installations?

[indiscernible]

(Multiple Speakers)

We fill the large orders -- the deal could spread over a number [indiscernible] [indiscernible] large orders that are over $50,000 per single order, were about 24 percent of our total revenue this quarter. In comparison last year, Q4 was about 18 percent. So, yes, we did see more large orders. We did see some increase in average order -- order size. In fact, we saw increases in all the order sizes because of the quarter but the large orders were significantly higher than what we've seen over the past eight or maybe twelve quarters.

One correction, you speak orders not revenue. And it's important because some of the large orders don't get [indiscernible]

(MULTIPLE SPEAKERS) Third subscriptions included [indiscernible] subscription or something so not necessarily revenue, it's more the order flow.

That's correct.

From a broader perspective, two questions for you. Just going back to this new product InterSpect™ product. Will you guys recognize hardware revenue office sell of that product?

Yes.

And you don't think that will impact your margin structure at all.

[indiscernible] we will have higher cost of goods for service [indiscernible] but still products carry healthy margin and [indiscernible] traditional favorite, your generally traditional revenue traditional [indiscernible] for us. Not building the model about [indiscernible] multiple revenue or most of our [indiscernible] higher portion because [indiscernible] work but again, (indiscernible) work margin but as I said before, the revenue [indiscernible] contribution to [indiscernible] (indiscernible).

[indiscernible] marginally.

Then last question. From a big picture perspective, Gil, is that there's some discussion that we're about to hit an upgrade cycle within the firewall markets. Some of these boxes have been out there for four or five years. Can you give your perspective on that and what you're seeing from your customer base? How much of your incremental product sales are replacing an older box vs. the [indiscernible] in incremental box?

Actually let's first address two [indiscernible] and then let Jerry give more color on that. First [indiscernible] subscription program when the customer wants to upgrade and they need to replace old hardware or get the latest features and get huge [indiscernible] functionality, they do need to buy again the license if they pay subscription and actually our enterprise base subscription and support program help in doing so and in a much better way and we see more people who are actually trying to get into the program even if they were (ph) there before. So a lot of that goes in multiple product revenue but [indiscernible] subscription to the subscription revenue. So that's what is a important point to note is that very very different from a hardware [indiscernible] customer basically buys both the hardware and the software. Every time they need to upgrade something. So [indiscernible] important to note and especially when you move the subscription vs. product it should all be looked at (indiscernible) license revenue because it's all license revenue [indiscernible] license revenue support services [indiscernible] support revenue's are fairly small. I think that is the main point. Jerry, as far as replacing old products from competitors maybe you can take lessons and [indiscernible] in the marketplace.

Primarily I will just reiterate what Gil just said which is our base is continually upgrading. There's no cycle that happens every three or four years with that perpetual license and subscription which is why you see subscription continuing to grow and why people buy such a large percent of the base is moving to MG and all the various versions of MG as we improved it over time including the current one of MG with Application Intelligence™ is because they're upgrading. So our software is continually being upgraded so the majority of the base is on the newest version, the latest version of the leading security technology out there. So we don't put our customers through what some of the other ones might or if they decide they want faster hardware or your hardware is the different question than our software because it's being continually upgraded all the time. Yes, we do see and we did see again this quarter business coming out of people that are displacing old technology from older and other security companies or even some of the current security companies where the technology and solutions they have in place have not proven to be as effective. So we see that as an opportunity. We continue to take advantage of that opportunity as people move to our quality of security technology but our base is always upgrading. So I'm not -- I don't know if that fully explains that or not but that's an ongoing occurrence on a monthly quarterly basis all the time for us.

Are you guys seeing more optimism now at you're buying base? More optimistic than you were three months ago?

Out of which base?

Your buyers?

Oh, sure. We saw that evidenced in fourth-quarter and we talked about activity and the activity turned into orders during the quarter and we've seen that out of our partners, out of our field people and out of the customers I talked to.

[indiscernible] add to what Jerry said. We are just returning -- Jerry and me -- from around the world from our [indiscernible] conference, meetings all over [indiscernible] people around the world and the level of enthusiasm we found [indiscernible] something we haven't seen for several years and that's the good news. And [indiscernible] let's remember [indiscernible] put it into perspective, a strong quarter makes everybody happy and makes the forward momentum very strong and I'm not sure but [indiscernible] quarter is a necessary commitment or indication for the future is going to be so bright. I think long-term we have a very bright future I think the whole behavior of the customers, the salespeople, the channel is very (indiscernible) trying to avoid getting carried away too much with that because I think we'll have to prove it every quarter and (indiscernible) will be working very hard to show every quarter.

And how about you guys have a number of installations yet?

Close to 300,000 [indiscernible]. (MULTIPLE SPEAKERS) [indiscernible]

Gregg Moskowitz of Susquehanna Financial Group.

Morning, guys, nice quarter. Just a follow-up on the SSL VPN commentary as it relates to your web security strategy. I know you're going to provide some more details on the analyst day but generally speaking, are you still keeping your options open as to buy vs. bill for that?

(indiscernible) if we get our option open [indiscernible] in two months means that we have something. We are not just speculating and so far all [indiscernible] acquisition over longer term will be good technology than any preceding [indiscernible] this quarter Check Point (indiscernible) as you know, from the market place in general and from Check Point's experience there aren't [indiscernible] great companies or technologies there that feature [indiscernible] hard to follow business model.

Okay, and then just a question for Eyal -- looks like the tax rate kicked down a little bit in the Q, or such and just wondered if you could talk about anything going on there and should we still expect a 20 percent rate in 2004?

First of all the answer to the second part of the question is yes. Our tax rate as you all know is a complex model and could fluctuate as a result of the revenue's (indiscernible) quarter. We do expect tax rate next year to be in the range of 19, 20 percent and this is just -- it's not time and every quarter [indiscernible]. That's all.

Sterling Auty of J.P. Morgan.

Couple questions. Talked about times of revenue contribution in the March quarter from Zone Labs but could you give us an idea what the expense contribution would be?

Right now [indiscernible] first balanced contribution between revenues and expenses. One thing you must remember -- we haven't fully integrated the company -- we will do this in the second half of February but right now we are looking at fairly new trial contributions at these quarter so the revenue will be couple million and several million dollars in expenses also going to be almost the same. Moving forward, hopefully it will improve.

Don't forget, we're also adding some shares because part of the deal is shared deal (indiscernible) is going to be a little higher and that's one of the reasons for one [indiscernible]. Everything is a small [indiscernible]

What would you expect the average share count for EPS to be?

For full quarter. Yes this is also a proportion after it the time but full quarter probably at between 7 and 8 million shares.

(MULTIPLE SPEAKERS)

And for the quarter I think we are expecting approximately

(MULTIPLE SPEAKERS) (indiscernible) one third plus over all extension of the number of shares that depends on share price and so on, so I think right now we're modeling approximately 4 million increased number of share roughly. Again let's remember these are always [indiscernible] and things can bury from those estimates and some of those are beyond our control [indiscernible] control like the share price. So just sharing our [indiscernible] there's some level of flexibility around them.

Let's switch gears a little bit. This new Web access stand-alone device you're talking about -- including SSL-VPN, how many additional features such as authentication, authorization, is there any third party technology that will be part of this or is this all internally developed?

We integrate with a lot of technology but right now [indiscernible] based on Check Point technology and that for the most part of it. Again let's remember with [indiscernible] sophistication system one of the greatest things about authentication is [indiscernible] of indication that the [indiscernible] Check Point control box [indiscernible] every indication every PKI environment actually we support multiple authentication environment which I think is also fairly unique to products in our marketplace. And some users can use [indiscernible] PKI infrastructures others can use [indiscernible] infrastructure and some may use the Check Point one, which by the way bundling in his or will also very important for the [indiscernible] perspective deploying [indiscernible] VPN or even the FireWall solution our products come right out of the box with 100 percent of the functionality and we do integrate [indiscernible] enterprise. Compare it to most of the competitors, you must have a third party product to achieve the same basic functionality level that Check Point has.

Okay, and then looking at your three prong strategy, looking at your product roadmap what else is needed to kind of round out the product [indiscernible] reported?

First we hope to [indiscernible] something that will take us through many many years so we will see more of it. I think the important [indiscernible] we put in the perimeter one, with Check Point Express, VPN-1 Edge, another product -- I think before (indiscernible) million for the past 3, 4 months, rounding [indiscernible] InterSpect™ and Integrity will be a strong focus on the internal security side. And with the functionality from Zone Labs to the Web and the new Web Security Solution Jerry described I think we will have a very rounded offering the most comprehensive offering in our marketplace for [indiscernible] free area. Obviously next year, three years from now and so on, we will keep adding to that and we will keep evolution -- everything in the (indiscernible) of the area we're doing our first step there will be a lot more going on in the future.

One of the things to think about probably expand on two weeks is the fact that even (indiscernible) three pillars all is fully integrated to be [inaudible] very powerful and something really nobody else is doing and my brand just from point (ph) products and might have a broad sweep but nobody has a fully integrated software architecture that addresses both [indiscernible] perimeter internal and Web which I think is going to be very powerful, along with the integrated management of all that functionality, is going to be deployed through enterprise. This is a pretty exciting and very powerful story [inaudible] .

And then, Jerry, can you give us an update as to the programs with resellers? Couple of quarters it was talked about the different structure and how you might help the real top tier reseller? How's that going and in what areas has it been rolled out?

It's been rolled out around the world and very positively received. We continue to update our program, I mean, we're always modifying it, tuning it and enhancing it [indiscernible] advisory council we run in all major geographies around the world -- both with distributors and with our value added solution providers. And the major change this last year was a version of a platinum level. It was very positively received and it's been a big benefit to us and the fact is we already party announced that we got some or changes in that [indiscernible] program we're going to be announcing first quarter that we are going to continue that trend of working very very closely with our partners to ensure we have mutual success in the marketplace.

Gene Munster of U.S. Bancorp Piper Jaffray.

In terms of the previous [indiscernible] said don't get carried away with optimism and if we back out Zone Labs and look at the sequential change, obviously, it's the seasonality in it is positive. You've gone through all the elements. If -- from a very high level is what's going on in your business more market-driven or product driven? Obviously it's a combination of both but if you had to focus on one or the other, what would you -- which perspective would you take?

First, I want to correct an impression, I am extremely positive and very optimistic and I think all the trends we've seen are very very positive. But as we know, the proof is in the pudding and not that we're getting too carried away with one strong quarter. Actually if we were factoring all the positive things we've seen last quarter you'd have seen the estimates that are much much higher for fourth the next quarter and for the next few quarters but let's remember that I mean when you look at one very strong quarter, I don't necessarily think it's a full indication for the full year. I do think that we do see, actually, a pretty strong [indiscernible] next quarter because we're seeing a quarter that's almost flat in the quarter versus supposed to be down from a seasonality standpoint. As we said before, the contribution of Zone Labs is expected to be minimal so if all factors are going to be strong -- I mean, we'll be seeing the core business we have strong fundamentals of Zone Labs requisition (indiscernible) [indiscernible] IF Zone Labs don't (ph) have a strong quarter like they expect and so on we have a lot of [indiscernible] upside. [indiscernible] Q1 customers had a very strong year end, Maybe we'll start the year with the same enthusiasm that we finished last year -- maybe they won't. I think we will meet again in three months and we'll see what the results have been.

Can we oversimplify and say that the whole inflection point here -- I realize to your point it's just one datapoint but can we oversimplify and say that it's market-driven more product driven obviously it's both but is there one that's overwaning (ph) the other?

I think [indiscernible] I think both and both are important factors here and I think we seek the closest technology sector. I hope (indiscernible) inflection point like you do so we share the same hopes or same (indiscernible) and I do think there's a lot to do with product or the company element because we -- last quarter made pretty big changes to our business with new products and new pricing for products. New support and subscription for [indiscernible] and so on. It wasn't necessarily an easy transformation on our part -- we actually saved some tough changes, some parts of the quarter but the end result is very very good. So I think what we did because we did so much last quarter had a big impact on that (indiscernible) another base [indiscernible] earlier. Last quarter product -- revenue from products that were launched last year was almost 25 percent. That's a lot. In a business like ours. That's actually showing [indiscernible] and the activity we're doing in Check Point has an impact on the (indiscernible) results [indiscernible] comments to [indiscernible]

(MULTIPLE SPEAKERS) [indiscernible]

We have time left for one last question from Sean Jackson of Avondale Partners.

Just one quick question. How much of the revenue was derived from existing customers and how much was removed?

We don't have that full analysis at this point in time. So that's not [indiscernible] analyze the data.

Can you comment? (technical difficulty) Mentioned that mentioned before (technical difficulty) or the strength was from existing customers to just buy more stuff.

[indiscernible] let's remember 97 of the Fortune 100 are Check Point customers and more than 90 percent of the Fortune 500 so over the last 10 years (indiscernible) such a simple check of whose (indiscernible) and our base [indiscernible] almost everyone is. [indiscernible] still [indiscernible] very able to drive a very significant portion of revenue from new customers and [indiscernible] numbers [indiscernible]

(MULTIPLE SPEAKERS)

Our estimated (indiscernible) 20 to 30 percent of our business is coming from new customers. And especially on the success of Check Point Express and it goes to the midsize company and became very very successful in Q4. I have reason to believe this number is still valid for the fourth-quarter but as I said the accurate number is not on hand at this point.

I would like to turn the floor back to Eyal Desheh for further comment.

Thank you, everyone, for your participation and for your patience with [indiscernible] and asking all those good questions. If you want to speak to management or investor relations following the call, please call Investor Relations Department in Redwood City, California at area code, 650-628-2050. Again, area code 650-628-2050 and we hope to see many of you at the New York investor day. Thank you very much and goodbye.

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