Check Point Software Technologies Ltd (CHKP) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Check Point first-quarter 2004 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, at which time we ask that you please limit yourself to just one question. It is now my pleasure to turn the floor over to your host, Janine Zanelli. Ma'am, you may begin.

Good morning and afternoon, and thank you for joining us to discuss the first quarter. As a reminder, this call is being webcast live from our website and is being recorded. To access to live webcast and replay information, please visit the company's website at www.checkpoint.com/ir. The replay will be available through May 4. 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 would 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, Check Point's ability to integrate Zone Lab's operations effectively, the impact on revenues of economic and political uncertainties and weaknesses in various regions of the world, including the commencement or escalation of hostilities or acts of terrorism, the inclusion of network security functionality in third-party hardware or system software, any unforeseen 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, 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 products, and other factors and risks discussed in Check Point's report on Form 20-F for the year ended December 31, 2003, which is on a file with the SEC. Check Point assumes no obligation to update information concerning its expectations. Thank you, and I will now turn call over to Eyal Desheh, CFO.

Thank you, Janine; good morning and afternoon, everybody. Let me share with you the results of the strong quarter for Check Point and provide some more detail on the financial and accounting treatment of the Zone Labs acquisition.

Revenues for the first quarter were $116.1 million, an increase of 11 percent compared to the $104.8 million in the first quarter of 2003. Since the acquisition of Zone Labs was concluded on March 26, 2004, the operating results of the first quarter did not include Zone Labs, and they will be consolidated commencing in the second quarter.

Our results for the quarter did include a onetime acquisition-related in-process R&D charge, and our balance sheet reflects the impact of the transaction. The revenues for the first quarter, which were $2 million above the high end of our guidance, were achieved without the revenue contribution expected from Zone Labs at the time the guidance was given.

Net income and earnings per diluted share for the first quarter, including an acquisition-related in-process R&D charge of $23.1 million, were 41.9 million and 16 cents per share, respectively. Net income and earnings per diluted share for the quarter excluding the impact of the in-process R&D expense were $65 million and 25 cents per share, an increase of 8 percent and 5 percent, respectively, compared to $60.1 million and 24 cents per share in the first quarter of 2003.

The year-over-year increase in fully diluted share count from 253.2 million shares to 259.8 million shares was mostly a result of the increase in our stock price.

The consolidated balance sheet as of March 31, 2004, includes all assets and liabilities of Zone Labs, including goodwill and intangible assets recorded at the acquisition. The accounting treatment of the acquisition resulted in total amortizable assets of $65 million, of which 23 million of in-process R&D were written off this quarter. The remaining intangible assets and stock-based compensation in the aggregate amount of $42 million will be amortized over a period of four years.

Deferred revenues increased by a total of $18.5 million, of which 9.8 million was generated by Check Point business during the quarter, and 8.7 million resulted from the consolidation of Zone Labs. Total deferred revenue now stands at $124.4 million.

Cash flow in the first quarter was strong. Excluding the impact of Zone Labs acquisition, the company generated net cash flow of $75 million. After payment of 114 million in cash to the stockholders of Zone Labs, and the addition of 19 million resulting from the consolidation of Zone on our (ph) balance sheet, total cash and interest-bearing investments as of March 31, 2004, was $1.58 billion.

Product revenues compared to Q1 2003 were up 8 percent to $63 million, accounting for 54 percent of our total revenues. Software subscriptions were 44 million, or 38 percent of total revenues; and services 9 million, or 8 percent of total revenue. As a result of the strong March business, Accounts Receivable were $80.6 million and DSOs, Days Sales Outstanding, were 56 days for the quarter.

Our effective tax rate was 18.5 percent, and the operating margin excluding in-process R&D expense was 59 percent. Just to summarize my part, it was a good quarter in all financial parameters. I would like to thank you for your time, and I will now turn call over to Jerry.

Thank you, Eyal. Hello, everyone. I am glad you were able to join us for the call today, and I would now like to share with you what we have experienced this past quarter in the business and sales environment on a global basis. As Eyal just explained and you have seen from the press release, we had another good quarter in many respects, and I am pleased to share with you my views as to why we're doing well.

We are pleased with our results in all regions, with another quarter of good geographical balance, with the Western Hemisphere business unit contributing 41 percent; Europe, Middle East, and Africa 43 percent; and 16 percent from our operations in Asia-Pacific and Japan. While we experienced good growth and success in each of these major markets, we experienced very strong growth in EMEA and Japan, as both markets were very resilient in the adoption of all of our products throughout the quarter.

In analyzing our performance across the various products, we experienced success with all of our solutions including in our core VPN-1 gateway for enterprises; but I would like to give special mention to three products as highlights for the quarter. The first is VPN-1 Edge, which is the Check Point appliance we announced in Q3 of last year. This product was designed to specifically provide our enterprise customers with a very cost-effective and easy-to-deploy device for their rollout of a large-scale VPN infrastructure. Many are in the early stages of connecting hundreds to thousands of remote offices and branch offices to their central headquarters and are finding this product allows them to do this successfully and within their budget, especially as they get to utilize our industry-leading management products to manage this potentially complex network.

The next major product I want to highlight is one we discussed last quarter as well. Check Point Express, our new family of products specifically designed for midsize businesses, showed continued positive results again this quarter. We again saw many of our existing partners as well as new partners adopt this product as the solution of choice for midmarket customers. Feedback from both partners and customers indicates that we have brought to market a product that has the appropriate functions and features, packaged into a solution that is priced very competitively for this market.

The final product that was very successful this quarter is InterSpect, the new internal security gateway we announced at the end of January. While it may not have been a big contributor to revenue, as it was only announced on January 20 and is not yet in volume production, the demand from partners and customers was higher than expected. InterSpect is what many would call a disruptive technology, as it is different from all of the current products in the marketplace today that are trying to protect the customer from internal security threats. These other products all incorporate similar technology to each other that has failed to provide an easy-to-use product that can be deployed in-line to block against worms and viruses and that truly secures the internal network.

InterSpect with its proactive approach and unique technology has received very positive reviews from both partners and customers during the first two months of it being available for installation. We were pleased to see InterSpect named a hot pick by Information Security magazine. The magazine's editors select hot pick solutions for their innovative approach to persistent or emerging security problems, significant technical or functional advancements over competitive solutions, and for being realistic and practical solutions that can be implemented to enterprise IT environments.

In addition to these three product highlights, there was one other element of our success this past quarter that I want to highlight for you. That was the enterprise-based support program or EBS, our program we have discussed previously that provides our customers with enterprise coverage for subscription and support. We saw another strong increase with this product as customers continue to see the value in upgrading their firewall and VPN-1 gateways to NG with Application Intelligence. NG with Application Intelligence is the premier product for enterprises needing the best possible perimeter security solution available today, and EBS is the program that allows them to upgrade whenever they are ready to do so.

In my travels this past quarter, I met with hundreds of partners and customers all over the world and was very encouraged by the feedback I received from them not only about our current products, or the new ones we will be announcing over the next few months, or the addition of Zone Labs and its endpoint security technology, but also about our strategic direction that we began communicating in Q4 of last year. It seems what we're doing is what they want and need. To cover this in a little more detail, I would like to now turn the call over to Gil.

Thank you, Jerry. Jerry and Eyal already gave you some details about the first quarter. I am also pleased with what we achieved in Q1. The first two quarters have clearly demonstrated a positive business strength which we hope will continue for a long time. Besides the microeconomic trends which are important to the positive trend, the key element in our future growth is our perimeter-internal-Web security strategy.

As Jerry mentioned in his comments, the signal that we're getting from our customers clearly shows that we're on target in addressing some of their most pressing security needs. Every customer we speak to regarding their needs and concerns for 2004 will mention perimeter, internal, and Web security threats, along with the need to secure every desktop within the global enterprise. They also must manage their environment.

Another indication of our strategy being in line with customer needs is the initial strong acceptance of InterSpect. Customers are very concerned about the security of their internal network, ensuring secure Web communication and expanding their VPN. The need for a high level of security keeps increasing, and with our technology we keep raising the bar for our competitors by better addressing the needs of the customer.

SmartDefense, Application Intelligence, and InterSpect are good examples of such innovations from Check Point. In the coming months we're going to release a host of new technologies in the field of Web security, technologies that will change the way customers implement security to protect their Web infrastructure and to connect their employees and customers over the Web.

Our competition realizes our lead in security and the limitations of their own technologies and architectures. Looking at their strategies and hearing customer feedback, you can see how Check Point is emerging as the only major security vendor focused on the customer's most pressing enterprise security needs. We're doing this by addressing the perimeter, internal, and Web security threats and scaling all the way to desktop and servers throughout the enterprise.

Most importantly, today we have the only architecture that can provide integrated management across the enterprise. We can provide ease of deployment and use that (ph) scale from the smallest business to the largest enterprise or service provider. And with the addition of Zone Labs we scale beyond security gateways into every desktop to provide true end-to-end network security. With products like InterSpect we provide a flexible and effective architecture inside out.

While all these initiatives are long-term in nature, they also provide short-term results. So far we have a very good acceptance from the marketplace. We will work are to make it continue in Q2 and the rest of the year.

As far as the future, our guidance for Q2 includes the results of Zone Labs, which will be consolidated for the entire quarter. We're pretty optimistic about that and about the prospects of next quarter; and we expect a healthy revenue in the range of 123 to $127 million, and hope to achieve earnings per share in the range of 23 to 25 cents. Thank you very much, and I will now open the call for questions.

(OPERATOR INSTRUCTIONS) Michael Turits of Prudential Equity Group.

You saw a very strong product growth, especially I think it was the first year-over-year product growth in quite a while. What would you say are the components of that? In other words, you didn't have a lot of the new products in, in terms of InterSpect. Is most of the growth coming from upgrades, replacements? Is it coming from expansion of networks in terms of capacities? What is really driving the product gains?

In terms of the products that contributed to that, I think in order of importance in the last quarter it was Check Point Express, VPN-1 Edge, and InterSpect. I think on the analyst day, we gave some metrics about percentage of revenue from new products. In this quarter I think it went up to 25 percent of the revenues of product -- product revenues from these and other new products.

I think it comes from different areas, because each of these products addresses different needs. With VPN-1 Edge, it is the large-scale VPN and their expansion. In Check Point Express it is much better coverage for medium-size businesses.

InterSpect, which is the newest one and therefore it is the third on my list, not actually from a success standpoint, InterSpect was the most surprising and most exceeded expectations, because it only shipped for less than half the quarter. But InterSpect is addressing a completely new market, both for us and for the marketplace, which is the category of those internal gateways, a category that I do not really think existed even though some other (ph) products are in the relevant space.

So these are some of the trends that we think helped. We had some good upgrades. We had the EBS program which contributed as well. But the core products, I think I gave the major explanation.

Just a follow-up here, on next quarter's guidance, what is the effect of Zone Labs? How much of a contribution for revenue? And is there dilution relative to EPS?

I think we said the dilution is expected to be additional, approximately 7 million shares. So that is going to impact the EPS. On top of that we said that results owe (ph) about 1 to 2 cents dilution expected. We didn't break down the Zone Labs contribution in terms of revenues, and we intend to report them consolidated.

Okay. Thanks.

Sarah Friar of Goldman Sachs.

Good quarter, guys. Maybe you could just talk to us about the Zone Labs integration. Where does that stand? Obviously the deal has closed a little later; but do you feel on schedule in terms of where you are with R&D and in terms of integrating the salesforce?

Yes we do, Sarah. Obviously closed anywhere from six weeks to a couple weeks late, but we made great progress on a global basis with the integration, the cooperation, the coordination of the Zone Labs field organization with the Check Point field organization.

It is ongoing, but there has been great acceptance and receptivity out of both the customers and the partners, so we are well into executing there. As well as all the other internal ones. We had a number of task forces that have all worked on their integration plans, the coordination, the cooperation plans, and I feel we are very much in line with what we expected to do and will do during 2004.

Great. Eyal, just a couple of deal metrics. You normally give us the numbers of deals over 500 K. And then on the stock buyback, it looks like you didn't do any share buybacks this quarter. What is the plan for as you issued look forward?

Right, we did not do any share buyback this quarter; and I think everybody is aware of the reason why we were prevented from doing it. The buyback program is open and approved, and we will be reviewing this from time to time, and see whether and how we are going to act upon it. Other than that, I don't think that we have anything to add.

So you don't expect to necessarily do any in the June quarter, even though (technical difficulty) guidance for that?

No, there is no guidance; I didn't say anything about what we expect. But we don't.

Just deal metrics; what were deal sizes like this quarter? I think you normally give orders over 50 K and then any deals over 1 million.

We had pretty nice orders over 50,000. It was I think about 22, 23 percent of our business was generated. Percentagewise a little less than what we did last quarter. But Q4 always comes with a lot of large orders. Compared to Q1, it was I think a significant growth in business coming from large orders, and somewhat increase in the average order size.

Okay. Great. Thank you very much.

Robert Breza, Royal Bank of Canada.

Great quarter. Jerry, I was wondering if you can give us a little bit of insight into the new products coming up next quarter. Maybe just timing, and then how much of that is in your guidance.

Our current plan right now is it's going to be in the next month or two. At least the primary Web security solution that Gil talk about. Although it will be an initial product with more functions, more features, more capability added to it and the family of solutions it will have during the course of this year. I don't think there will be any impact in Q2 from --between the announcement date and the availability. So I don't look for any revenue impact in this quarter in our guidance.

Okay. Just a quick follow-up on your comments with InterSpect. When would you expect that to be fully rolled out, then?

It's going to continue up this ramp during the course of the year. But I think it is going to be into the third or fourth quarter before it gets more meaningful than what it is. We are in a very good ramp right now, with the demand far exceeding supply for the first couple of months. It is going in through our channel. It is going into evals. It is going into the pilots. We had a lot of initial business that went from evaluation to a pilot to full acceptance and acquisition. So we're running ahead of that ramp.

But I still expect it to continue through all the geographies, with all the partners, with all of the customers. It is still going to take a while to get fully ramped up to what the demand is in the marketplace. This turns out -- and I'm sure you've done channel checks. The partners are really excited about this. It really fits the bill versus some older technologies that never quite have met the customers' needs. And we are getting that same reaction out of customers that are trying it, that this is really the technology they think that can protect the internal network. So we're excited about it. But I still think the ramp goes all the way through the end of 2004.

Great. Nice quarter.

Todd Weller, Legg Mason.

Just a couple questions. The nice growth in deferred revenue, is that more a function of growth in subscription versus product sales?

Yes.

In terms of the enterprise support program, what inning are we in, in terms of the upgrade cycle there among your customer base?

Well, remember -- I don't know if there is an inning to this. This is annual. This goes on all the time, that we see any customers that have not been on it, the base continues to grow, and it grows because they want to upgrade the Check Point with N.G. -- I mean N.G. with Application Intelligence. And that is continuing. Once they get on it they stay on it. So that is a very healthy pipeline and revenue base that we have continuing forward.

Jerry, in terms (technical difficulty) the Zone product, when do you think this will get kind of fully engaged with your channel from a timeline perspective?

Right away. It's not going to go to the entire channel right away. We have a very focused rollout program of bringing it into our platinum partners first, then to our premium partners on a global basis. We're doing it different in each geography, depending upon the appropriateness of the product.

It is very much focused at the high-end enterprise customers first; so we're taking a phased approach. But it will happen very quickly for large accounts and for our key partners.

One thing I want to mention maybe about Zone Labs is that unlike Zone Alarm which has a very short sales cycle, the Integrity enterprise product sales have a relatively long sales cycle because they go to many, many desktops and because it is not just a few gateways or one project; because of the impact it has on the infrastructure. That will have impact as new channel starts the cycle from zero, basically.

With that said again, we think that we are going to have nice results with Zone Labs, given that Zone Labs already has a nice revenue stream, and a nice pipeline, and a very good salesforce delivering every quarter.

Thanks.

Gregg Moskowitz, Susquehanna Financial.

First, just wondering, Eyal, what the contribution was from Nokia during the quarter. And also if you could just generally characterize that relationship. Any changes or update there?

I can speak to the numbers. Nokia is approximately (inaudible) percent of our gateways are installed on Nokia hardware. I think that (ph) we have seen any major change to this number in any direction in Q1. As to the relationship, I will turn this to Jerry.

It continues to work and they continue to be a valuable partner of ours. This is now an eight-year-old relationship that we have with them being one of the platforms on which we deploy. As Eyal said, it is about 40 percent of our base.

I'm very pleased with them. I think our partners are, and the customers are that choose the Nokia platform. It's got a lot of good functions, features, and capability. So we continue to work very well together.

Jerry, you referred to InterSpect as a disruptive technology. Just wondering if you have any insight into whether -- and I know it is early --but whether some of the deployments have been occurring more alongside an IDS or and IBP product? Or if you have typically seen it being implemented in environments that don't have that technology?

It is early on, but it is both. They have gone in and displaced existing IDS/IPS technology. They have gone in alongside. And they have gone into some customers that hadn't yet done it because of the concern, the lack of functionality and capability it provided them. So we have seen all three scenarios so far.

Thanks. Lastly, Eyal, do you have any rough guidance for deferred revenues into Q2?

I don't think it should be any different from our regular guidance, which is it could move up and down by about $5 million. I think that is probably where we will see it next quarter.

Okay. Thanks.

Ed Maguire, Merrill Lynch.

Thank you. Did you see any change in the competitive landscape as a result of the NetScreen-Juniper deal?

There is a lot going on in the market. I don't know that it resulted in any impact to the financials of the bookings of the revenue in Q1, but there sure is a lot of concern about that as to what customers are looking at.

But I feel very good, as we said last quarter, about what the implications are for Check Point. We are being left in emerging as the only real major independent security company that can provide a perimeter and internal Web security. So it has been very positively received by our partners as to what we provide into the customers as a security company.

Just a follow-up. Could you provide the breakout of what proportion of sales came from open systems, and which what proportion came on appliances? And also wondering whether you may break out the proportion of your sales that come on your own appliance platforms?

We don't have the full analysis yet for these numbers for the quarter. So I would rather not go into full detail. But I think it is around 50-50 on open platform versus appliances. Of course, with InterSpect and VPN-1 Edge and with the success of the new Safe@ productline, our (technical difficulty) became more meaningful this quarter. But I don't want to give you a detailed breakdown, because I don't have it.

But just remember that these three products, VPN-1 Edge, Safe@Office, and InterSpect, are not playing in the same marketplace as the one we are, with both the Nokia appliances, Nortel appliances, the many open systems that we have.

What we do see, we do a lot of good traction for the SecurePlatform software (ph) that we provide, which runs on open servers. We do hear good feedback. But right now the changes in real percentages of sales are not very large so far.

Just a quick follow-up on VPN-1 Edge. Could you talk about characteristic deal sizes for that product? Are they larger than you see typically?

They're going to be. What we see, and I think it's typical of what we have seen in other respects, very large corporations buying them but they're long-term deployments over the next couple of years, before they can roll them out into thousands. But we have won a number of transactions where they may only quarter 50, 100, or 200 now, but eventually they will deploy thousands of them.

We saw a lot of that activity this last quarter, and there is a lot more in the pipeline that will, I think, be very similar in characteristics to that.

Thank you.

Chris Russ, Wachovia Securities.

I was wondering if you could comment on the GX and the VSX, the virtual LAN solution for data centers? How those products performed during the quarter?

Also we're hearing good things about your partnership with Crossbeam and the high end of the firewall VPM market. I was wondering if you could comment on the status of that relationship and how important Crossbeam is to you or your efforts in the high end of the market?

I can start. I think the relationship with Crossbeam is excellent and they really help us, especially with products like VSX. I think that in terms of VSX and GX there was nothing very major or meaningful in the first quarter. But I think clearly Crossbeam is one of the most successful partners that we have on the high end.

(inaudible) They were good. We still do well in both markets. I think we are the dominant supplier yet. The number one supplier in the GX area for wireless carriers, and we still do very well with our virtualize product. Crossbeam is a very good company. They have got a very good product; they are being well received in the marketplace, especially with high-end enterprises. They have got a unique architecture and approach, and they are executing very well, so they are a very good appliance partner.

We like the relationship with them; but more important is that the customers and partners like what they bring to market. So it is just typifying the benefit of why we have multiple platform partners; because they have different products and different solutions and different architectures that reach different segments of the market on a price performance basis. And Crossbeam evidently has done something that customers like.

Great. Just to follow-up on Zone Labs. At the analyst day there was a slide that indicated I think there were 400,000 seat deployments for the Integrity productline and the Enterprise for Zone Labs. Could you give us an indication of what the seat deployments were for that Integrity product this quarter, the March quarter?

I don't think we have that data yet.

Do you happen to know if it was up sequentially?

I assume, but I don't want to provide numbers which are not accurate, just top of my head.

Okay. All right. Thank you.

Chris Debiase, Smith Barney.

Any metrics on SmartDefense subscriptions in the quarter?

SmartDefense subscription actually was pretty well in the quarter. We don't break it out. But I can tell you that it was 40 percent more then Q4. It grew sequentially by about 40 percent, and that also had a nice contribution to our deferred revenue and to the deferred revenue in the subscription lines on the P&L.

Any change in the pricing environment, especially at the midmarket and low end with Check Point Express and the Safe@ products?

No. Not at all.

Great. Thanks.

Matt Barzowskas, First Albany.

First of all just a numbers thing. Could you break down in the deferred revenue versus products and maintenance and service? And also taking a different spin on the competitive landscape, now with all of your new products coming out, are you seeing different competitors than you once saw? Or is it still the same big guys out there?

Let me give you the breakdown, which is simple, on deferred revenue. It is mostly subscriptions and services. We added $8.7 million from Zone Labs. The mix there is not very different from Check Point. A few products there, but again mostly subscriptions and services.

Okay.

On the competitive landscape, yes; as we move into these new markets of internal security, which we moved into, we absolutely see a new range of competitors. As we move into Web security we're going to see a new grouping of competitors as well.

We really haven't -- not in the enterprise space for perimeter security, not even in mid-size businesses; because we have been there. People buying our core enterprise products. But probably in the small business, yes, there is some more competitors. And in internal security there's newer competitors, as there will be in Web security. So, we will compete with more and different companies as we move into these two new security areas.

Is there a major company that you can point out? Or is it just a number of different ones?

A number of different ones. It is across the spectrum. Anybody that has an IDS/IPS product would probably try to compete with our InterSpect product; and there will be a range of them in the Web security as well when we announce that later this quarter you will see, that you might recognize.

But this product is doing very well. Because like I said, a lot of those older technologies, even if they've been renamed, have not been providing the level of protection the customers need for their internal networks. That is why this has been very well received in the marketplace and we're excited about it.

Okay. Thanks.

Daniel Cummins, UBS.

Thank you. First just a couple more questions on your partners. How are sales on the Nortel platform going? Also, maybe a comment on Blade Fusion, given that NetScreen is out now with a Blade box.

Nortel did very well. The fact is, I can tell you across the board that our big partners had a very, very strong Q1 relative to a year ago. Revenues are up very nicely, and they're are all being very successful and doing very well.

And they all have different architectures, different deployment platforms, different price points, functions, features that are being accepted in the marketplace. The key thing for our customers is they get to buy the best security software, and then they get to decide what platform and what architecture on which to deploy it.

That gives them a variety of options on the architecture, the performance, the price performance, the functionality, etc. I think that is why it is so well received, our approach to what we do. Crossbeam has a Blade architecture, so that is not something new for us or for our partners.

A couple quick questions on InterSpect. We went to a customer seminar last week, and there is a lot of enthusiasm for this. That is what we can hear. But perhaps more than at a gigabit. Are we going to see a version 2 sometime this year between 2 and 4 gigabits that could be deployed on an internal backbone? And will we see more OEM partners for the hardware?

I think we will not disclose necessarily our future plans for that. But yes, we are working on new versions, on new innovations and new things that our customer looks (ph) like. I think one of the things InterSpect did do to the marketplace is showing what we can do with (inaudible) at a higher speed, protecting multiple segments.

And so far we're getting excellent performance. This is one of the very, very strong points. Sometimes we beat competition by a factor of anything from 5 to 20 on certain Application Intelligence and application level attack blocking.

The other one is about our partners, and I do believe that you will see sometime in the -- I don't know if I should say near future -- but this year, that we will have partners carrying the InterSpect technology on their platform.

Terrific. Thank you.

Gene Munster, Piper Jaffray.

Could you repeat how many subscriptions were added for Zone in the March quarter? And maybe give a delta for how many subs were added for Zone in December?

How many what?

Subscriptions.

We said we didn't know this quarter.

We are not going to -- at this point, we're not prepared to discuss the details of the Zone business. I don't want to promise that we will give a lot of detailed breaking out for Zone next quarter. We are going to report Check Point consolidated as we have in the past, as Zone is going to be a part of our ongoing business. So I don't want you to expect to get a whole lot of details, but enough to understand where the business gets its contribution from.

Let me ask you from this perspective. If you just look at the operation of worms in the quarter, obviously there is a big enterprise component with Zone. As we just kind of think about the business and we track those elements in the marketplace, as you look at the results, does that seem to be a meaningful driver in us tracking Zone's business?

I'm not sure we understand the question. We didn't include anything from Zone in our results for Q1.

No, no. I am just saying for going forward, as you look at, for example, viruses and worms and outbreaks, are those going to be significant drivers to Zone's business, given the consumer element to that?

Yes.

Yes, this is something that we (indiscernible) refer to or we know enough about the business there to (indiscernible) that each time there is a new worm or a virus attack, it is a driver for the consumer part of the business of Zone. And we can definitely see the direct correlation between those attacks and demand. We have seen that this quarter as well.

On the enterprise, I am not sure that this is a one-to-one relationship, but longer-term this definitely -- these kind of attacks drive more business as people want to secure their endpoints.

One final question, just on the technical release of SP2. Any thoughts on how that is going to play out and the potential impact on your business?

Microsoft.

We don't think it is going to have any meaningful effect on what we do, but time will tell. I think what we are saying is that the customers that are buying Zone Labs or other PC security products are the ones that are truly concerned about security of their PCs. And that is not necessarily the ones that Microsoft is targeting with their software. They are targeting more the ones that don't care about their security, and therefore get something bundled in and so on.

Thank you.

Phil Winslow (ph), Credit Suisse First Boston.

Solid quarter. Most of my questions have been answered. But one that does remain, total number of gateway installations this quarter?

Let me look through the figures here. Well, pretty good, I can always tell you. But they always (multiple speakers). The total number of gateways, 331,300 or 332,000 gateways.

Also just sort of getting back to the Zone Labs side of the business, you all provided some revenue metrics for full-year '04. What do you view as the breakdown between enterprise and consumer there? I had been 50-50; do you see that changing this year?

No. (inaudible) Change, yes, we do expect the enterprise business to grow a little faster. But, I think for this year 50-50 breakdown is pretty solid.

Great. Thanks, guys.

Bob Stimson, Banc of America securities.

Great quarter. A couple of questions. I just want to understand the tax rate. With the inclusion of Zone Labs, will that impact the allocation of how you do the R&D allocation on the overall rate? And will that affect your tax rate going forward?

Let me try to make it as simple as I can. First, the effective tax for the reported (ph) quarter, if you exclude the onetime in-process R&D write off, it is 18.5 percent. When we will add Zone Labs' business next quarter, you should not expect to see a major change in the tax rate, as Zone Labs is not going to make a lot of contribution to profit in Q3.

So, you can expect to see a pretty similar tax rate throughout the year, plus or minus 1 or 2 percent. The impact of course when Zone Labs gets more profitable, and we expect that to happen in Q4 and beyond, Zone Labs is a U.S. company; it is tax (technical difficulty) 35 percent like U.S. corporations. It does not enjoy the enterprise status that Check Point has in Israel.

Okay. So basically the percentage of the revenue coming from Zone Labs that is profitable will be taxed at 35 percent, versus the overall corporate tax rate.

The profits (inaudible) the profits that we generate.

Got you. Great. Thank you.

At this time I would like to turn the floor back over to you for any closing remarks.

All right. Thank you very much all of you for your participation on our conference call. If you want to speak to management or to our investor relations department following the call, you can call our IR department in the Redwood City office at phone number 650-628-2050. I repeat, area code 650-628-2050. You can also call my office in Israel. And we will be happy to discuss additional questions you have following the call. Thank you very much.

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