Check Point Software Technologies Ltd (CHKP) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Check Point third quarter financial results announcement conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following today's presentation. It is now my pleasure to turn the floor over to your host, Mr. Eyal Desheh. Sir, you may begin.

Thank you. Good morning and thank you for joining us to discuss the third quarter. This is Eyal Desheh, Check Point's CFO. I will be your host today as Jeanine (indiscernible) is on maternity leave.

As a reminder, this call is being webcast live from our website and is being recorded. To access the live webcast and replay information, please visit the Company's website at www.checkpoint.com/ir. The replay will be available through November 1. If you would like to reach us after the call, please contact the Investor Relations Department at area code 650-628-2050.

On the call with me today is Gil Shwed, our Chairman and CEO and Jerry Ungerman, our President. 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, including our expectation for revenues and EPS in the future. Other segments 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 expectation. Factors that would cause to 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 of escalation of hostility or acts of tourism; the inclusion of network security functionality in third-party hardware or systems software; any unforeseen development 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 party with which Check Point has foreign 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 file with the SEC. Check Point assumes no obligation to update information concerning these expectations.

Let me now share with you the results of the quarter and provides some more detail on the financials. As you will hear in more detail from Jerry and Gil, this was a very good quarter for Check Point and was driven by the strength of our core markets for VPN, firewall and management products which displayed strength in all of the geographies.

Revenues for the third quarter were $129.3 million, an increase of 22 percent compared to 106.3 million in the third quarter of 2003. Revenue growth was again led by the increase in licensed revenue, which was up 25 percent compared to the third quarter last year. We also saw a 21 percent increase in subscription revenues driven by continued adoption of our EVS programs with success of SmartDefense and the sales of our Zone Alarm consumer products.

Net income and earnings per diluted share for the third quarter were $66.8 million and 26 cents per share, respectively. This includes 2.4 million of net acquisition related charges. These charges relate to our amortization of intangible assets and deferred stock compensation. Net income and earnings per diluted share for the quarter excluding acquisition related charges were $69.1 million and 27 cents per share, an increase of 18 percent and 17 percent, respectively, over last year. This is the highest EPS reported since 2001.

Fully diluted share account was 258.3 million shares, 8 million less than last quarter. The reduction was mainly due to our successful share buyback program. Under the buyback program, we purchased a total of approximately 10 million shares for a total cost of about 200 million. This quarter, we purchased 6.8 million shares for a total cost of close to $122 million.

Deferred revenue this quarter was $124.8 million, an increase of 25.6 million and 26 percent over last year. Total expenses for the quarter were 60.4 million, including $2.9 million of our acquisition related charges. As you have seen in the press release, our operating income excluding these charges improved by 16 percent compared to Q3 last year and operating margins improved from 54 percent last quarter to (technical difficulty) this year to 56 percent this quarter.

Our total number of employees was practically unchanged at approximately 1400 at the end of the quarter. We continued to generate strong cash flow from operations this quarter -- 64.4 million compared to 58.4 million in Q3 last year and total cash and financial investment at the end of the third quarter were over $1.5 billion. Cash collection continued to be good, resulting in better than our normal range for DSO -- days sales outstanding -- ending up this quarter 49 days compared to 51 days last year. Our effective income tax rate was 17 percent, as in Q2 this year. I'm pleased with our financial performance this quarter. Thank you for your time and will now turn the call over to Jerry.

Thank you, Eyal, and hello, everyone. I'm glad you're able to join us on the call today. I would now like to spend a little time explaining to you my views about the quarter and our accomplishments.

As you have read in the press release and heard from Eyal and his remarks, we had a very good quarter. We again saw very good growth in product revenues with an increase of 25 percent on licensed revenues versus the third quarter of 2003, and this was led by sales of our core VPN and firewall products. Based on what we saw in the market during the quarter and what we lead (ph), it appears we are outperforming our competitors and continue to gain market share in many product segments and across all geographies.

As you know, we're rolling out many new products and technologies this year and we are pleased with the positive reaction we are receiving from both partners and customers. InterSpect, the very innovative internal security gateway that protects the internal networks of our customers from the spread of worms and viruses, as well as preventing unauthorized access, saw continued progress this quarter as an exciting new solution in our product portfolio. While the contribution to revenue this period was increased over last quarter, it has not yet hit the inflection point we expect can happen either this quarter or next and to begin to be a more meaningful percent of our overall revenues.

In addition, this was the first quarter shipping our new technologies and products to provide robust protection for the Web infrastructure of our clients. This includes our innovative Web Intelligence Technology, which we provide as an add-on module to our core VPN-1 gateway, or as part of Connectra, the new Check Point branded Web security appliance.

Also included in Connectra is SSL VPN technology, parts of which are available as an add-on to our VPN-1 gateway via our SSL network extender module. During the quarter, we received positive feedback about the new products and especially with the ability to acquire the capability as a stand-alone solution or to integrate it with an existing gateway. And while the initial activities are centered on trials evaluations which should be the case for the next few quarters, we did realize revenue already this quarter and expect to see that increase again this coming quarter.

We also experienced good results with our EndPoint Security Solution, particularly in the consumer market with the traditional Zone Alarm Pro (ph) product, along with the early success we're having with the Zone Alarm Security Suite. It appears from our results that consumers have accepted the advice of Microsoft that even if they upgrade to Service Pack 2, that they should still install a third-party security solution to ensure the endpoint is properly secured.

During the quarter, we also announced a new endpoint security solution for our enterprise customers named Integrity Secure Client. This is a new high-end solution and it is our first step in incorporating the technologies, the client technologies, from Zone Labs and Check Point into a more comprehensive endpoint product for our customers. Overall, the activity levels and interest for this new solution are very high.

As I said earlier, the key to our success this quarter was the strength of our core firewall and VPN-1 gateway sales. We continue to win market share as we believe this is the best product for enterprise customers to secure their network, as well as to provide secure connectivity to remote offices and for remote workers. While the main strength of the increase in revenue was in the enterprise market, we also saw good results in the medium and small-business markets. Our customers truly understand the difference in the capability of NG (ph) with application intelligence versus the other alternatives in the market.

We again saw good balance across the major geographies with 44 percent of our revenues coming from the western hemisphere, 40 percent in Europe and the other 16 percent from Asia-Pacific and Japan. In fact, this was the best quarter ever for operations in Asia-Pacific. But in total, we saw solid sales results in all major markets, including many significant wins at major accounts where we won against our key competitors and in many cases, displaced their installed products with ours. In addition, activity remains high in all regions.

The rollout of our updated partner program continued during the quarter and should be completed by the end of the year. I personally am spending a lot of time with our partners and their reaction to our new program and new products has been very positive. They feel we have listened to them and the customers in designing and bringing to market products that meet the ever-changing security needs. They are experts at securing the networks and data that is being communicated around the world to a wide range of users. They believe we allow them to provide this service to their customers with a combination of the best security technology, management capability and with the widest choice of deployment platforms. This is important feedback. As having a 100 percent indirect business model, our channels are actually part of our sales organization and provide daily service to our customers.

While we augment and support what they do with a direct touch model, it is our working relationship with the channel that has been and still is a major asset. That is why we continue the enhancement channel program. We want to ensure we provide the proper level of resources and capability that our channels need to be successful in representing our products in the market. What we hear from our partners and customers is that our strategy of providing perimeter, internal and Web security solutions, all of which can be centrally managed by the Check Point management products, that this provides them an architecture that allows them to deploy a multilayered security infrastructure which no one else can provide. This, we believe, is a real strength we have in the eyes of our customers and compared to our competitors and one of the reasons we believe we will continue to gain market share.

With that, I would like to once again say how pleased I am with our Q3 results and that I look forward to our future as we roll out many new product initiatives and continue to provide the best security solutions available from any vendor in the world. I will now turn the call over to Gil cover some more business highlights.

Thank you, Jerry, and good morning everyone. As you heard from Eyal and Jerry the in-depth analysis of the quarter, this past quarter was a very good one. Check Point's leadership has strengthened our market position and translated into very good financial results. Our results this past quarter continue the trend of good business growth, which we have generated now for the past four quarters since the introduction of our expanded prodigy (ph) to grow (indiscernible) our security product offering.

In Q3, we are continuing the ramp-up of new products such as InterSpect, Integrity and Connectra, we saw very good strength in our core perimeter and firewall VPN market. Where we continued to see good potential and success in the new internal and Web security areas, you might remember that we think that the core perimeter market has the largest dollar potential and we intend to continue to lead this market, which is something we've done for the past 10 years.

As we begin the fourth quarter, we expect that the results, success and leadership in the past quarter will continue into Q4. With that, I would like to update our revenue and earnings per share expectation for the fourth quarter.

Currently for the quarter, we expect to see revenue in the range of $136 to $144 million and earnings per share, excluding the acquisition charges, of between 28 and 29 cents, which represents an increase over our original plan for 2004. As you might remember, original EPS guidance was 99 cents to $1.03 and we've (indiscernible) today to bring the range to $1.05 to $1.06, about the top end of the previous range. Thank you all for participating in the call and looking forward to your questions.

(Operator Instructions) Robert Breza, RBC Capital Markets.

Good morning, everybody; nice quarter. I guess regarding the guidance, could you give us some direction regarding the revenue mix, specifically as a licensed line? How should we think about that on a sequential basis? And then as you talk about the mix, can you talk about the upside in the support and training? Is that a precursor to you kind of like getting the channel trained and new product growth going forward? I know you talked in your remarks about the program being completed by Q4. How should we think about the revenue mix line, please?

Robert, let me take the second part of your question and Eyal will do the first. We don't charge our partners for training them on new products. We've run a series of -- you've heard us talk about the Check Point experience, which is both partner and customer focused, as well as we do a lot of seminars. But we do a lot of product rollout, a lot of product introductions to the channel.

Where the training comes in is training customers on the use of our products, which we have done through our ATCs on a global basis. So there's a difference between training partners to sell versus customers to use. Now I will let Gil address the first part of the question.

I don't have in front of me the exact breakout of our plan, but generally, we expect strong license growth in the fourth quarter. Keep in mind that subscription is an annuity, so basically, it's not a huge change (ph) area (indiscernible) move from one quarter to another. But we do expect a nice ramp-up, I believe, with the numbers I gave, between $6 to $12 million in the license revenue between Q3 and Q4.

Great, thank you.

Greg Moskowitz, Susquehanna Financial.

Thank you, and nice quarter, guys. Jerry, I wanted to ask you, because you mentioned gaining share. And as you know, Juniper recently reported a weakness within the NetSpring (ph) division, some of which seemed to be due to internal initiatives as they scale the business. But I was just curious -- did you see any change specifically in competitive deals with NetSpring this quarter?

Yes, Greg. As I said, we saw around the globe, very positive successes for us. Both in head-to-head competitive situations, as well as in a number of major situations, we've displaced competitive equipment that was previously installed either stand-alone, or maybe where we were jointly in an account. So, we saw very good progress in all geographies competitively, and that may be why our numbers are up and the others are not.

Okay. And then on the sales front, you hired Kevin Maloney over from IBM to run worldwide sales a few months ago. Where has the focus been so far? Are you trying to sell a bit differently to your customers? Eyal, it sounded like headcount was pretty flat, but are you hiring more feet on the street from a sales perspective, or maybe replacing some of the underperformers? What should we look for there?

I don't think there has been any real change. I think Kevin as an additional resource specifically to me to come in and devote full time to these sales VPs we have around the world and from a very, very good addition, a very positive addition. It's just more capacity. I think one of the things we said coming into all of these new product rollouts is we are significantly expanding both the market segments we are covering and the security areas we're covering. And it's going to take more capacity. So, Kevin is a step in that direction. It has been a very positive one, and yes, we will continue to add more -- both sales and systems engineering headcount in the field as we move forward.

Okay, thank you very much.

Joseph Craigen, Needham & Co.

Thank you. Just a follow-up on that last question. With talking about adding people in the field, what do you think that's going to do that the sales and marketing line? And also, could you comment on what happened this quarter with the sequential decrease in sales and marketing?

First of all, it's Eyal. I will take the second part of the question. There's always some seasonality on sales and marketing expenses or with a lot of events coming in and Q2 and Q4 and Q3 being a summer quarter, there's always a little bit lighter on that activity. So that's where you can see the numbers. But yes, you know we do not provide guidance for 2005 yet, so (indiscernible) with that. But some more expensive, we're not going to blow the expenses out of the sky, but we are going to add some needed resources where we see fit. And I think it won't have any meaningful impact on our markets.

Has that process of adding people started yet?

It's always ongoing, absolutely.

Michael Turits, Prudential.

Hey, guys, good morning. Eyal, can you walk through the effect of the purchase accounting breakdown on both the deferred revenue line this quarter and on the services so we have a good apples-to-apples comparison on a sequential basis? Just if you could specify what those effects were?

First of all, the impact of purchase accounting is diminishing as we go forward and it has been very light this quarter or was almost negligible. So there's no -- don't look for anything that is not -- what you see is what you get, (indiscernible). Deferred revenues -- in Q3, there's always seasonality. In fact, if you look at last year, you'd see that Q3, because most of our deferred revenue are in the form of our EVS (ph) contracts, a subscription as support, and their renewal cycles are more heavily toward the middle of the year and the end of the year. You could see last year and you could see this year, some reduction in deferred revenue. But when you look at the overall number year-over-year, there is a $25 million increase over there, 26 percent increase over there. Most of it is coming from Check Point's (indiscernible) business.

Okay so on the services line, we didn't have any roll-in of incremental revenues due to purchase accounting, that rules that you couldn't have taken prior maintenance revenue (multiple speakers).

When we acquired Zone Lab (indiscernible), there were deferred revenues in Zone Labs which pretty much disappeared. And if we would have included in next (ph) quarter, it could have added, I don't know, $1 million, $2 million each quarter, about a couple. But we wrote them off when we acquired Zone Labs and you haven't seen them. So, I mean, we haven't seen them. We haven't stated what is, but if you ask the question, could have been a million or two higher if we would not have to write them down due to purchase accounting.

We don't want to confuse anybody with what-if analysis on the purchase accounting. What you see is what you get.

Okay, thanks.

Sterling Auty, J.P. Morgan.

Thanks. On Zone Labs, can you just walk us through, if you can, what portion or how the revenue gets divvied up between the product line and the subscription line, or is it all on one area versus the other?

The consumer revenues from Zone Lab is about half and half, and half of this goes to product or to licenses, or even a little less than half. We (indiscernible) to say about 55 percent goes into maintenance, concept and subscription and is being treated exactly like all of our other subscription contract, which is going to deferred and then being amortized over the first quarter. But by and large, this is -- these are one-year contracts.

The enterprise business is very similar to Check Point enterprise business. And since it's new, the portion of subscription is smaller yet. So that's about 70, 30 percent -- 70 percent goes to licenses and about 30 percent goes to subscription and support.

Okay. And then on the new products, you have mentioned kind of in InterSpect, trying to get to the inflection point maybe this quarter or the quarter after -- if you just take a look at your new product program for this year, can you just qualitatively describe whether you feel that it gets tracking to what you would expect it? Has there been any upside or any downside to it?

First, we do feel very well about this. With InterSpect specifically, I will say -- I will start qualitatively and then move quantitatively. With InterSpect qualitatively, the good news is that we see larger deals than what we expected. And a lot of them we hope will get fulfilled in the next quarter and the quarter after them because they turned out to the bigger projects than selling few units and so on. So that's the good anecdotal part of what we hear.

Qualitatively, we started giving a year ago a measurement about new products, products that are less than two years in the market. In this measurement, we said that our target for the year is to be about 25 percent of product sales to come from new products. It was about 6, 7 percent a year ago, in Q3 last year, and about 2 percent, the quarters before that. So right now, we're at about 33 percent of our product sales that are new products that did not exist two years ago. And these products include Integrity, InterSpect, Connectra, Check Point Express and many, many others -- VPN-1 Edge and so on and it includes a long list of products.

So just to give an example, our target was about 25 percent; we're roughly at 33 percent. Having said that, you have to remember that some of these products are part of our core business. And it is not the new segments that we're speaking about, such as the perimeter and such as saying internal security and Web security. But a product like Check Point Express is still part of the core Check Point business. We've been selling to mid-size businesses a long time and we will continue to do that. So that's -- but, still the measurement is going from 2 to 3 percent first half of 2003 to approximately 33 percent of sales now.

And then just lastly, I think there is a headline some place that may have misquoted the revenue guidance for the fourth quarter. Can you repeat the revenue guidance?

The revenue guidance is $136 to $144 million.

Okay. I think you had a 134 to 136, instead of 136 to 144. But hopefully that will clarify it. Thanks, guys.

Thanks for the clarification.

Ed Maguire, Merrill Lynch.

Good morning. Could you provide any either geographic color on some of the competitive displays; I guess geographic or also talk about some of the competitors -- where you might be seeing areas of weakness among your competition?

Ed, I don't know if it was anything geographic. This is a very consistent picture that we have globally. As I said, it was the best quarter ever in the Asia-Pacific. Japan did well and we did good in Europe. We had -- it just seemed seamless to me. I cannot pick out a geography that said we were better than our competitors or anyone.

I think we beat competition in all of the geographies, both in competitive situations, as well as displacement. So I cannot relate to that.

One thing I can say based on two anecdotal deals that I have seen -- we have some big Net Screen (ph) wins, or actually displacements, in Europe. But even though many of these accounts are global accounts, they're not just European accounts. But accounts that are headquartered in Europe, we see big Net Screen displacement in the past quarter.

I guess what I was also trying to get at is whether you're seeing an inordinate amount of displacements either at the environment, or in the small-medium business sector, given some of the challenges some of your competitors have had this quarter.

I think we see it more in the enterprise space on a displacement. I think we've seen competitive wins in the medium-size and small-business marketplace.

Okay. And could you provide the percentage of orders over $50,000? That is a figure you have given in the past.

It was -- about 23 percent of the business was orders over $50,000.

Okay, great. And what was the proportion of revenues on Nokia platforms?

They're very similar to last quarter, around 40 percent. (multiple speakers)

Between 35 to 40 percent. No changes there that are notable.

Thank you.

Israel Hernandez, Lehman Brothers.

Good morning, and congratulations, guys. Service Pack II has been out now for a couple of months or so. Can you provide us a little qualitatively feedback as to what type of impact that has had on the zone business, in terms of downloads, but also potentially perhaps expanding the market? Thank you.

It seems to me that so far, the impact that it has was currently marginal. On one hand, Microsoft, it puts a lot of focus on security, and Microsoft has encouraged everyone to use third-party security. From the same time they provided more security on the SP-II.

I think that as far as I've seen, the amount of business we're getting from the Zone website, the consumer business, is fairly stable before and after. And, it's actually fairly good, level, I mean, slightly better than what we expected, let's say six months ago. It's actually continuing very well. We were one of the first vendors and several large consumer security vendors didn't support SP-II when it comes out. We supported SP-II and all of our products -- SecureClient, Zone Alarm, Integrity -- all of them were running SP-II day one when they came out and I think that only helps.

Let me just add -- very anecdotal, but I've landed a number of situations. The last two weeks, I was traveling the United States and it's not going be on the consumer side or the zone side, but it is on the enterprise side. There seems to be -- some people were waiting, looking, hoping that the enterprise market -- and they're very disappointed in their evaluation of SP-II. Most people had to turn off all resources. They can't use their computers. So it has been a big disappointment, and I think that is going to bode well as we move forward in the enterprise market with our EndPoint Security Solution with reality versus promise.

Great, thank you.

Chris Russ, Wachovia Securities.

Good morning and congratulations. Question on the new product sales -- I guess last quarter was 35 percent. Did that pick up this quarter?

No, that's fairly stable percentage-wise, approximately one-third of sales (ph).

Okay. And then looking at the core of business, you said that there was strength I guess in Check Point Express and VPN-1 Edge. Did those grow sequentially?

No. Actually, there wasn't any. The core strength this quarter that we saw was in the core VPN firewall, the VPN-1 Pro, Provider 1, the real core enterprise products. They contributed nice amount; actually, more than what we anticipated.

And then you mentioned market share gains. I guess you might be referring to NetScreen. But also in sort of the low end or mid range of the market, we saw that Sonic Wall and Watch Guard had disappointing quarters. Do you think you're gaining share in that segment of the market as well?

I think we're gaining share there, but our presence there is still minimal, so we have a lot of potential there.

Okay. And then, did InterSpect grow sequentially? I think you mentioned it did well. Did it do better than the second quarter?

It did better than the second quarter, yes.

Okay, great. And then Connectra, you did get some revenue from that, is that correct? Or, was that a meaningful amount?

It depends on what you define as meaningful.

Yes, we did, and I am pleased with it so far, Chris.

Okay, great. And the second release of InterSpect; is that out at this point, and when would you expect a second release for Connectra?

InterSpect, we're in release 1.5 (ph), and the 2.0 is coming (indiscernible) in less than a month. And with Connectra, I think we're at Connectra 1.1, in the next one is coming in the next few months.

We've gone through 1.1 and 1.5 on InterSpect, with 2 0 being -- that big one will be here I think the end of this month.

Okay. And is it reasonable to assume that once those upgraded versions are out, that you will see meaningful traction for both those products -- InterSpect and Connectra?

Well, sure. That's part of the whole rollout, and part of it getting there is some people start with 1.0 some way, and because we add new functions and features --.

I tell you, the resupplies that I've seen with InterSpect is (indiscernible) -- and by the way, Red Fox (ph) slowed down revenue a little bit. The fact that in organizations that we were expecting to get in the door with one or two units, we are hearing that, you know, we did a great product, we want to evaluate it for 15 or 59, and sometimes even 500 units.

Now, that is very good news because once this picks up, the revenue ramp-up will be very quick. In terms of short term, it's actually having an effect to the downside, because these projects don't take -- unlike selling a $40,000 piece of technology when you deal with 15 units and we deal $0.5 million and $1 million projects; these projects don't take two months, they take six to nine months to deploy. So the good news is that the resellers and the customers are very bullish about those projects.

And just a final question on your partnership with Cross (ph) being we're hearing very good things about their platform and traction in the market. And are they critical to your success in the high end of the market?

They're a very good partner. They're doing very well. They're executing. Nokia had a good quarter, Nortel had a good quarter. I think Crossbeam (ph) had another good quarter. We're seeing our platform partners are doing well.

Nokia made a series of announcements during the quarter about new platforms, new pricing, new price performance, new operating systems. So I am very pleased with them and all of our platform partners. But, yes, Crossbeam is doing well. They're very visible in the marketplace. And like I said, Nokia had a very good quarter as well, and I think they even mentioned that in their earnings call the other day.

Great, thank you very much.

(Operator Instructions). Chris Debiase, Smith Barney.

Thank you, good morning. Jerry, you had mentioned some strength in smart defense. I think in the past, you gave some metrics around that -- the number of subscriptions. And then also, what's your sense on what percentage of your customers have migrated to SmartDefense thus far?

Chris, I'm going to let Eyal get the numbers here to take a look at that. I don't remember ever giving any SmartDefense specifics, and I know I don't know the percentage.

You're correct, Jerry. What I can tell you, though, is that Smart (technical difficulty), which is part of our subscription, has been growing consistently every quarter since launch. And today, we are generating close to 4 million per quarter and it's going up all of the time. And regarding to customer adoption and acceptance, that's up to Jerry.

I don't have that. You can probably figure that number out; I just don't know it right now, Chris.

Okay, thanks. And then one of your competitors also made comments that they have seen an uptick in the last couple of weeks of October. Have you seen that as well due to seasonality, fourth quarter budget flush type stuff?

We're not talking about fourth quarter yet, but we're focusing on third quarter and saw a very good third quarter, as you saw, including a good September. So you just heard our guidance what we think fourth quarter is going to be, so.

We're pretty optimistic about the fourth quarter. We think the potential is there clearly with the trends that we have seen and the positiveness of our salespeople -- we have all good reasons to believe that Q4 will be a good one.

Alright, thanks.

Walter Pritchard, SG Cowen.

Hi, just one last question. Could you, on the guidance, just tell us what the difference is beyond IT spending in the macro environment, in terms of the low-end or the high end of your guidance? I mean, I guess what I'm trying to get at is -- what type of contribution from new products and from core products are you expecting in Q4?

I don't think that we have broken it down to that level. My expectation is that both of them will show meaningful growth in Q4 over Q3 and over last year.

So, it's safe to say that the majority of the difference then between the low end or the high end of your guidance is just macro related?

Pretty much, yes. Again, predicting the future is always a challenge. We collect sales forecasts, we work with partners, we look at the macroeconomic. But at the end of the day, every month has something else. And at the end of the day, we can have another $10 million that come in the last week or another $10 million that come in the last day or not have them. So what you're trying to base is based on no big surprises either to the upside or downside.

And so far, I think we are fairly consistent and stable amount that. As I said, I do hope that we will see good results. We will see results that are pretty bullish. I am not -- Q3 always has a seasonality effect and you always be kind of careful in Q4. I think we are much more optimistic than we were three months ago.

Thanks, guys.

Shaul Eyal, CIBC World Markets.

Thank you. Good quarter, good numbers. Really give from a macro standpoint level -- you know, last quarter, you came out and provided the guidance for the third quarter, I think kind of the lower end of the guidance, kind of implied sequentially down quarter. What has happened throughout the quarter? When did it happen? Was it again a strong back end-loaded quarter, the kind of reverse (indiscernible) used?

I think first, we came up with a reasonable expectation for the quarter. We were positive on Q3. We said that we expect good business. We were expecting a little bit more seasonality than actually happened, but Q3 is seasonally -- this quarter with summer (ph) seasonality. So we have to remember that too. But I am -- at least last quarter, was also positive about the third quarter.

And in terms of the first quarter itself, as we said, the one source of strength was the core VPN firewall market. I believe that we generated there $3 to $5 million more than we expected; not necessarily more than last quarter or anything like that, but more than we expected. And that was several large deals -- not just large deals, but the whole market generated that. In some large deals, what we saw is competitive displacement that resulted in big enterprise contracts for new products, and so on. So overall, I think that had some good contributions that moved up from the low range of our guidance to the high end of our guidance. But let's keep in mind the high end of our guidance, but we were still within that guidance.

Maybe one more -- you asked about linearity or back-end loaded or whatever. It wasn't very different than our normal linearity, even though it was a summer quarter. And it was not very back-end loaded, and it was actually developed in a pretty normal fashion throughout the month.

Just for clarification, I think you mentioned that you did approximately 4 million from SmartDefense subscriptions this quarter?

Close to that, yes.

Okay, that's great. Again, thank you very much and congratulations.

Todd Raker, Deutsche Bank.

A few questions. First, on the share buyback, can you talk about your plans going forward here in Q4 and '05?

We tend to continue and evaluate share buyback. And we will see how and if we continue to program.

So there's no firm commitment that you will continue to buy stock back?

Not at the moment.

Can you guys quantify Zone for us? What percentage of the business was Zone?

No. We have not done it last quarter and we have said very, very clearly -- Zone business now is fully integrated with Check Point. We introduced Integrity Secure Client, which is the combined product between the Zone technology and the Check Point technology. So an attempt to split it could very well be artificial. And I think that we have they very nice base. So growth on the sound products, they were very, very good, made a very nice contribution to our business. But as we want to be consistent with what we've done last quarter, we will not break this separately from the rest of the business.

Can you then talk about maybe the growth profile from sequential growth perspective? Was sequential growth on Zone higher than the base business?

No, not this quarter. The previous quarter, and maybe in future quarter, yes; not this quarter.

Okay. And again, I just want to clarify -- what percentage of the Zone revenue stream is consumers today?

About two-thirds.

About two-thirds consumer?

Yes.

And, Jerry, you talked about Service Pack 2 actually being a positive catalyst in driving consumer revenue. Can you walk me through why you think it's a positive catalyst? Because my understanding is that there actually is a tentative offering baked into the Service Pack 2?

Yes, but it doesn't work very well. Even Microsoft said, and we have to go back and look at their announcement, that they recommended that consumers still acquire a third-party firewall. This was not an end-all security solution. There's a lot of things it doesn't do to fully protect somebody's personal computer.

I understand. But, from a functional perspective in Service Pack 2, there is no prompting to go out and buy a third-party product?

No. Actually, Service Pack 2 set tells you that you do have to activate a firewall, it asks you which firewall you want to use. And let's remember, with Zone Alarm, we had the free products before. So the fact that the customer would just download us would not change that. Actually, if you read almost every press review of SP2, you will find many, many articles from the top-tier business and trade publications that all says to Microsoft users -- you still need to download the real personal firewall and the personal securities suite, the really good one. And most, if not all of them, referred to Zone Alarm as the best one that you should use. So there's some highlights.

And can you talk about deferred revenue expectations here in the Q4, Eyal?

Deferred revenues, as you know, they're always a little tricky to forecast. Plus or minus 5 is our regular guidance, regular range. Could be up in Q4, because we are expecting a lot of renewal for our EBS (ph) programs that comes towards the end of the year as people use their budget and they know they need to do it when they begin the calendar year. So, we do expect this to be a bigger interest than the usual (indiscernible).

Last question --.

One more word maybe about SP2. I think SP2 increased the level awareness of users, of PC users, that they do need a personal firewall. And that is definitely helping our business.

Last question for Jerry. Can you talk about pricing environment, or ASPs?

No change. I've read some things, but we sure didn't see that. Pricing is very, very consistent and normal form all we've experienced in the past quarters.

Okay. Thanks, guys. Good quarter.

(Operator Instructions). Philip Winslow, CSFB.

Good quarter. Most of my questions have been asked, but I think I missed the metric; I'm not sure if you gave it for total number of installations for the quarter?

-- gave it, but we're willing to try. (indiscernible). But we will find and --

Of course you missed it, because we didn't give it. Gil's looking it up here.

I guess while you all look that up --.

Total number of gateways that we had right now was over 360,000, because that includes all types of gateways that we sell.

Great. Turning very quickly to the tax line, Eyal. As you look out into 2005, if Zone continues to track so well, what do you think that impact has on the effective tax rate, once again, as you look out into '05?

Are you talking about tax rate?

Yes.

I believe the tax rate -- as you know, our tax rate is related to growth. It's a little counterintuitive, but the higher the growth, the lower the tax rate due to the special incentive structure that we have here in Israel. I believe the tax rate next year will be anywhere between 18 to 20 percent.

Great guys. Thanks.

Sean Jackson, Avondale Partners.

Real quick -- on the cash flow generation in the quarter, the sequential decline is, again, seasonality effect; sort of the same reason why deferred revenue was down?

I'm not sure that cash flow and deferred revenues are closely related. Long-term, they are. There is a seasonal impact on cash flow. If you look at last year, you have seen that, you've seen that as well. It has to do with timing of payment disbursement and timing of -- and a little bit of timing on collection. But it's clearly seasonal. We started this over the last few years and we see the same thing in Q3. Even with that, I think we generated a very nice 64 million.

(multiple speakers) cash flow 64 million from operation is much better than a year ago of 58 million (MULTIPLE SPEAKERS).

It looks just like more of a timing of disbursements, as opposed to the timing of actually getting paid. Is that fair?

Primarily, yes.

Yes, primarily. I guess we are a little quicker in Q3 and customers are a little slower. But if you look at the DSO, you see that DSO is under 50 days, so it's very good. We had some annual rent payment this quarter and things like that. So that is what you see.

Thank you.

Vikram Kaura, Unterberg Towbin.

Thanks. Just one quick question. Eyal, what percentage of the revenue was from that government vertical? And, was that to your expectations?

The government vertical is around 10 percent of our business. We don't have the full analysis for Q3 yet, but I don't think that we've seen any material change. And we are not dependant on very large government contract because we work with tens of governments all over the world, and in the U.S. alone with tens or maybe hundreds of agencies, municipalities, states and cities. So it is really comprised of many, many, many orders with a lot of entities. As I said again, around 10 percent. The accurate number still has to be analyzed.

It continues to be one of our largest sectors and we continue to develop with the government.

Thank you.

Peter Cooper, Morgan Stanley.

One quick question. Do you have a current authorization under the share repurchase program? I know you said you wouldn't comment on a particular, but is there an existing authorization amount?

I missed the question, Peter. A little clearer.

So, on the share repurchase, do you have a current authorization? Is there a number of shares or dollars amount still allowed in the current authorization program?

No. As I said, we have $200 million in the program which we completed this quarter. Seeking additional of course involves discussion with our board. And if we have anything to report in that firm (ph), of course we will.

Thanks. And then one more strategic question. You said you saw displacements in Europe and things like that. What are some of the drivers being, maybe the better sales results? Is it you're seeing continued growth in remote excess, or is there any kind of thing that stands out from some of the replacement/upgrades?

I think, and I'll just tell you what my view is on many that I've been involved in, it's just the quality of the security technology. NG (ph) with application intelligence is a big deal in the enterprise market. And the fact that our competitors cannot provide that same level of protection in 2004 going into 2005 is the issue that many customers have. They may have made a decision in 2002, 2003 and they found out that their security technology cannot keep up with the new release of viruses and worms and threats that both the network layer and the application layers, what I see talking to some of these large customers that are making the switch.

Thank you.

Kevin Trosian, Wedbush Morgan.

Good morning, congratulations on the quarter. A couple questions on the InterSpect product line. I was hoping you could run us through a little bit on some of the marketing initiatives there. It sounded like you were satisfied that it grew this quarter, but maybe not quite as fast as you had hoped, and maybe what some of the reasons are for that? Thank you.

I think as I said, we are happy with the growth. We did grow sequentially from Q2 to Q3. And I think in terms of marketing, we're doing many seminars, many demos and a lot of educational activities on InterSpect, I've already said that I have seen in InterSpect. My good surprise was the fact that we've seen much larger deals than what we anticipated. And larger deals also means longer sales cycle. And not all these sales cycles have been consummated yet. So many of them will bring results next quarter or next year because it's no job selling one, two or five systems if (indiscernible) case is selling 10, 15 and we've seen even deals that are hundreds of systems to secure enterprises in a very, very large way.

But a couple of functional things that people are finding, and at least the studies I've been involved in and the valuations is the blocking of the ones in viruses is big. They see it instantly and it gives them a capability, even though they might have had competitive products, other alternatives, that they don't have an in-line device that can really do this. And the other one is segmenting the network zones and preventing unauthorized access. That's getting to be a problem and issue.

So there's some functional capability that we have on this product that nobody else has and the other alternatives customers have been evaluating, it has them excited. And that's one of the reasons we're getting into this really big potential deployments of the valuation. Once they're seeing what it is, they're just expanding the scope well beyond what with either we or the resellers thought was the initial need. And I think when we bring out version 2.0, that's going to add a lot of functionality that people have been asking for. So I expect it to continue to progress in a very positive fashion.

Good. Just in general, I think originally, some of the resellers were positioning it versus IPS. And I know it's not a true, or it's not even an IPS product, but who would you say some of the biggest competitors are out there, or you who go up against when trying to sell the product?

It's interesting, because you said it almost correctly. What it is it's better than an IPS product. It does a lot of things that the promise of an IPS always was going to do, and can't do. So we compete with all of the traditional IPS vendors, whether it's ISS or Symantec or Network Associates and Tipping Point, or (indiscernible) -- they all have -- Cisco has something there. They all have products that don't quite do what the customer wants, which is why InterSpect has really taken over from the lack of their fulfillment as to the direction and the capability of what it can do for the customer environment. So we're in that same segment. We're getting dollars that they're not getting.

Great, thank you very much.

Katherine Egbert, Jefferies.

Thank you. I have a quick question on the gross margin. It was up nicely this quarter and it sounds like it's going to be up next quarter as well. What do you think the midterm target for the gross margin would be, say, 2005 through 2006?

I don't know how you all do it, but I don't think we're talking about 2005, 2006 yet.

Is it reasonable to expect that the margin (indiscernible) the mid 50s?

I've said many times, and I will repeat it. Our goal is not the margin per se. Our goal is to grow the business and to grow the revenues and to grow the EPS. Now having said all of that, right now in the short term, I don't see anything material that will deteriorate the margin in a significant way. So actually for next quarter, I think that margin can improve a little bit. But long-term, it really depends if we make any substantial changes in the business. The way the business is run right now without big shift in revenues and the way we operate, margin is fairly stable and actually been very, very stable in our business for many years.

We've managed to improve margins from 54 percent to 56 percent from one quarter to the other. I think I mentioned, and when I talked to a lot of you, that we expect the Zone piece of the business to turn into profitability. And that, as the acquisition has changed the margin and as it moves to better profitability, the margin could improve. But you know, margin improve when revenues -- the increase in revenue exceeds the increase in expenses. We try always to run our business as efficient, as productive as possible. But the important thing is to grow net income and earnings-per-share, and let's not forget where the focus is.

That's important in our view and that's what we've been doing. And that comes with improved margin, that is great. But EPS growth, revenue growth, net income growth -- these are our main goals.

Okay, thank you, Eyal. Good quarter.

Thank you. Operator, we have time for one last question, please.

Tim Klasell, Thomas Weisel Partners.

Good morning, everybody. Most of my questions have been answered. But sort of from a high level, when you think of your opportunities for internal security perimeter and for the Web, after this quarter, what is your thinking for 2005? Obviously, the perimeter has the most opportunity, but how are the other two? Which one should we be thinking about having the most opportunity for Check Point?

I think they all have nice potential. I think as I said, dollar-wise, the perimeter is the largest and will remain the largest for the foreseeable future. But I think we have seen nice growth, nice stretch and a nice potential in all the other two.

Internal security, in terms of our product portfolio, with Integrity and InterSpect, it's probably six to nine months ahead of Web security with Connectra and the related products. But we see nice potential in all of them. So you never know in this kind of a market that are still fairly small for us but growing quickly, which one will make this big jump, and if one of them will make the big jump and sort of overachieve over the others. So I don't know that I can give a certain answer on that. We see nice potential in all three, and that's why we keep the investment on all three.

Good enough. Thank you.

We thank you very much for listening to us, and we thank you for participating in our conference call. If you want to talk to management following this call, please call Kelly Toney (ph) at our Investor Relations Department. Phone number is 650-628-2050, and I will call you back today. Since Jeanine (ph), as I mentioned at the beginning of this conversation, is on maternity leave, I will do all of the callbacks, so be patient and I will get back to you throughout the day or the evening. Thank you very much again and we will talk to you next time with the results of Q4 and annual results of 2004.

Thanks, everyone.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time.