Check Point Software Technologies Ltd (CHKP) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Check Point Software Technologies' fourth quarter and fiscal year end 2004 financial results conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to introduce your host, Ms. Janine Zanelli. Ma'am, the floor is yours.

Good afternoon and thank you for joining us to discuss the fourth quarter and annual financial results. 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 February 1.

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 Labs 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 systems software, any unforeseen developmental or technological difficulties with regard to Check Point's product, changes in the competitive landscape including new competitors or the impact of competitive pricing and product, 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 20F (ph) for the year ended December 31, 2003 which is on file with the Securities and Exchange Commission. Check Point assumes no obligation to update information concerning its expectations.

Thank you. And I will now turn the call over to Eyal Desheh, CFO.

Let me share with you the results of the quarter and the year and provide some more details on the financials. The fourth quarter marked the end of a great year for Check Point. Q4 was one of our guest quarters ever. Strong growth and a good mix of core products and new emerging products led to a very strong quarter setting new record levels in many areas. Our profitability for the quarter remained at an industry high with 58 percent operating income and 54 percent net income.

I'm going to share a lot of good numbers with you right now, so please bear with me. Revenues for the fourth quarter were $143 million compared to 115.3 million in the fourth quarter of 2003, an increase of 24 percent. Net income for the fourth quarter of 2004 was 76.4 million, and $78.7 million if we exclude net acquisition related charges. This is an increase of 21 percent compared to $65.3 million in the fourth quarter of 2003.

Earnings per diluted share for the first quarter of 2004 were 30 cents, and 31 cents excluding net acquisition related charges, an increase of 19 percent compared to 26 cents in the fourth quarter of 2003. Operating income, excluding acquisition related charges improved to $82.5 million from 68.9 million in the fourth quarter of 2003. And deferred revenues as of December 31, 2004 were $141.1 million, an increase of 16 million over the third quarter of 2004 and an increase of $35.2 million over December 31, 2003.

Operating expenses, excluding acquisition related charges, were $60.5 million for the quarter compared to 46.4 million in Q4 last year. While the majority of the increase resulted from the adding -- from the addition of Zone Labs, we also added resources to R&D, sales and marketing. Our G&A expenses were flat.

The Company generated cash flow from operations in the quarter of $73.6 million. As part of our share repurchase program we purchased 1.9 million shares during the fourth quarter at a total cost of $44.3 million. In 2004 we purchased a total of 12 million shares at an aggregate cost of $245 million.

Now let's look at 2004, the year. So for the year ended December 31, 2004 revenues were $515.4 million compared to 432.6 million for the year ended December 31, 2003. This is an increase of 19 percent. Net income for the year was $248.4 million and $278.7 million excluding net acquisition related charges. This is an increase of 14 percent over 2003.

Total number of employees was over 1,300 compared to over 1,100 at the end of 2003. The increase was due mainly to the acquisition of Zone Labs and some increase in R&D personnel.

Total cash added during the year, excluding the buy back and the cash paid for the Zone Labs acquisition, was $314 million compared to $288 million in 2003. Cash collection continued to be good resulting in days sales outstanding, DSOs, of 55 days for Q4, similar to the DSO level in Q4 last year. Our effective income tax rate was 17 percent.

It was a great year on all financial metrics. Now Jerry and Gil will speak more about the business and strategies.

Hello everyone. It is good to be with you today to discuss Check Point's business results this past quarter and to summarize the successful year we achieved in 2004. I thank you for taking the time to do so.

As you have seen in our financials, and just heard from Eyal, we had a very good quarter and I, along with the rest of the management team, am pleased with the results. We have continued to execute on our expanded vision of meeting a growing list of security issues faced by Internet users, and you can see that success in our results.

Our expansion this past year into internal Web and Endpoint Security, along with a continued focus on improving our permitter solutions, has met with positively reactions from partners and customers. Both audiences are pleased that we can deliver to them a broader set of security solutions built off the same architecture and code base and all managed by the same management infrastructure. This results in a higher level of protection at a much lower total cost of ownership than other vendors can provide today.

During the quarter we experienced good business results across all regions, with the America's leading the way by contributing 46 percent of revenue, with EMEA at 41 percent, and Asia-Pacific and Japan at 13 percent. We also experienced good growth in product sales and our subscription business, including the adoption of our SmartDefense Service as customers continued to upgrade to our newest versions to ensure they have the most advanced security technology installed.

Our core security products had another good quarter as we continued to win against our key competitors in the enterprise market. We also experienced nice growth with both the consumer products and with our new internal and Web products, both of which are building a nice base of customers in many early successes as we become established in these two new market segments.

The introduction of InterSpect 2.0 was well-received and resulted in an increase in demand. And we expect the same to occur with the release of Connectra 2.2 which happened just last week. Besides introducing InterSpect 2.0 during the quarter we also launched our new TAP initiative, or Total Access Protection, which will enable enterprises to defend all their network connected PCs regardless of location, ownership or connection method with unified remote access, Endpoint Security, (indiscernible) confusion prevention, and policy enforcement, the capability and level of protections that no other vendor provides to the businesses of the world connected to the Internet.

We also brought out a new version of our small-business appliance that includes the wireless access point, which enables small businesses to simply and affordably achieve secure, flexible wireless access to network resources anywhere and any time.

In summary, it was a very good quarter and a very good year. I'm excited about our products and the opportunity we have in the market today. Thank you again for participating in the call, and now I would like to turn it over to Gil.

2004 was a very successful year for Check Point. Not only because we delivered nice growth and outperformed operating results, but also since we executed very well in our expanded strategy. In 2004 we expanded the number of product lines we offer to enterprise customers from 1 to 4. We established our presence in the consumer market. And we have been able to show healthy and profitable growth in all segments. The strategy we established in late 2003 showed its really results in 2004, and will be the continued basis for our future. As we enter 2005, we're very pleased with the recent results in all of those segments, permitter security, internal security, Web security, and Endpoint Security, as well as the consumer market.

When we look to 2005 we expect another year of healthy growth. But the future is always hard to predict. We enter the new year with higher expectations than we had before. For the first quarter we expect to see nice growth of 17 to 20 percent in revenue over Q1 of 2004, which means revenues in the range of 136 to $140 million. Earnings per share, excluding acquisition related charges, is also expected to grow nicely and be in the range of 28 to 29 cents for the first quarter.

Though we will provide more details on our annual plan at our Investor Day on February 7 in San Francisco, our initial guidance for 2005 is for revenues in the range of 585 to $600 million, and earnings per share, excluding acquisition related charges, of $1.18 to $1.24.

We look forward to see many of you at our Investor Day, and we look forward to sharing our plans and strategies for 2005. With that I would like to thank you again for joining us on the call today and open it for questions.

(OPERATOR INSTRUCTIONS). Walter Pritchard of SG Cowen.

If you could go into a little bit more depth, Eyal, on the deferred revenue, and why you saw the increase of 16 million in terms of both potentially product as well as subscription -- software subscription and SmartDefense?

Yes. First it was a typical fourth quarter on a very, very strong business that comes in throughout the quarter. As always, the majority of our deferred revenues is software subscription and services. A very small quantity of product are deferred in there, but there are a few. And I think is a reflection of the overall strong quarter that we had. I mean you can see it in revenue. You can see it in profit. You can see it in deferred. You can see it in cash flow, and it is all consistent.

Okay. And then just one follow-up on the Asia business. I guess I would have normally expected that to be up sequentially. Is there any reason why that was down sequentially?

I don't know if it was down sequentially. We might need to double checks, but Asia actually had the record quarter this quarter. So we might need to double check that and see how (multiple speakers).

The only other part that is on here (ph) is Japan, because their fourth quarter is next quarter, but I would have to look at it, Walter, to see.

No, it is over (ph). Japan's fourth quarter is similar to the first quarter in the rest of the world, which is seasonably lower. The rest of Asia, China, India, South Asia, Australia, New Zealand posted a very strong quarter, which is a little bit offset by Japan. When you look at -- Japan is countercyclical in our business. They are -- our first quarter in Japan is the last quarter of the year, and it is much, much stronger. So that is the reason.

Okay. And then housekeeping-wise can you just give us a gateway number for the total gateways installed, or total units installed?

Overall we had 300 -- almost 386,000 gateways in total for Check Point.

And we added this quarter about 19,000.

19,000 were added. Total of 386,000.

Gregg Moskowitz of Susquehanna Financial Group.

Thank you and congratulations on a good Q4. I am wondering if you guys could talk a little more about the Zone Labs business, specifically across enterprise and consumer? And also, Eyal, if you could just provide the mix between enterprise and consumer for that?

We're not breaking the Zone Labs results separately. And actually by now we have pretty much embedded the Zone Labs business into Check Point, especially on the enterprise side. But generally speaking when we have made acquisition of Zone Labs we said that our expectation for the year is approximately $35 million in revenue for the year. And I think we have outperformed that by a little bit. We are seeing a little very nice consumer business on the Zone Labs part. And overall we're very, very pleased with what we have achieved in that business so far.

Yes, right now the mix in Zone Labs between the consumer and enterprise is about two-thirds consumer and one-third enterprise, but it can move.

Right. Okay. And then just following up on the Q1 guidance, Eyal, I know you typically see some seasonality this quarter, but just to play devil's advocate here clearly your seeing -- it sounds like more strength on Zone and you have the Version 2.0 is coming out, or that already came out on the InterSpect side and it just came out on Connectra. And obviously you have more visibility with deferred revenues. So can you talk a little bit more when you're kind of looking at that sequential decline for Q1?

I don't think we should have any decline for Q1. I think we're expecting a very, very strong Q1 on top of an even stronger Q4. I mean really the expectation now for Q1 is more than 20 percent growth over last year. Q4 was an exceptionally strong quarter for us. We hope it sets the trend for years to come and sets a new record. But generally speaking, I think we're expecting a much stronger Q1 than we expected before.

Okay. Maybe just one last quick question. Competitively it seems like Juniper got back on their feet with a pretty strong Q4. Although what was a little more skewed I think to the smaller and midsize businesses. Jerry, you talked about this a little bit but what are you seeing competitively out there specifically relative to Juniper and Cisco, any changes there?

I think we're doing better than ever. We had a really, really good quarter. I said it about our core products, our core market in the enterprise space. As you know we're a new entrance into the whole SSL VPN space which I think it's a strong suit of historically Juniper with their acquisition that they made, which is a big chunk of their revenue. So if you really analyze it you will see that we again gained probably significant market share against both. I know that anecdotally, and I think the numbers that have been announced so far indicate the same thing.

Robert Breza of RBC Capital Markets.

Congratulations on a nice quarter guys. Eyal, can you kind of give us some insight into your hiring plans for 2005? You gave us some guidance there. And any further clarification around what we should expect maybe just for licenses from a contribution point of view?

First we are really inviting everybody to come to San Francisco on February 7, and there we are going to share with you many more details about our plans for 2005. We mentioned that we have some increased plans, you can imagine that. You can see that from our plans for revenues and increase in income. We will increase our R&D. We will increase marketing. But more details will be shared with you in San Francisco. I need to give you guys a reason to come over there.

Sure.

What was the second part of the question?

Just clarification around what we should expect maybe for license growth going forward?

Again, we will share all the details when and then. And let's really focus on the quarter and 2004, which were great years.

Sure. Fair enough. Just one housekeeping item. What should we expect for a tax rate?

Around the same. Between 17 to 18 percent next year.

Great. Thank you. Congratulations.

Chris Russ of Wachovia Securities.

A very nice quarter. Hey, Eyal, a question for you on the DSO. I guess it went up by about 10 days or so, but I think you probably have to adjust that for the large increase in deferred. I am just wondering do you expect the DSO to decline in the first quarter and second quarter? I noticed last year it went up in the fourth quarter and then it subsequently declined in the first half of the year. Would you expect the same trend this year?

Probably. DSO did not go up by 10 days. DSO for Q3 was 49 days. And for Q4 last year was exactly the same, 55 days. Very typically DSO goes up when you have a strong quarter. Because you sell a lot, and then you only collect it the next quarter, and then it goes down. So there is some seasonality impact over there. No big deal. We always said our DSO's should be anywhere between 50 to 60 days. We're right in the middle, and I think we're in a very good position.

Did you guys disclose the percentage of revenue from Nokia?

We don't get any revenues from Nokia. Close to no revenues from Nokia. In terms of platforms that you run on, we believe that around 30 percent, maybe little bit less than 30 percent of our deployment right now are on Nokia, or Nokia hardware, Nokia appliances.

Okay. 30 percent down from I guess 35 percent in the third quarter?

Something like that. I'm not sure again. These numbers we are actually got some of them this morning, but --.

Look. They are all trailing edge numbers. I mean its reported after the fact. It is about -- it is in that range.

But appliances as a percentage of total platform is that still steady? In other words all appliance partners as a percentage of your license revenue?

No, I think the one trend that we are seeing in terms of platforms, the SecurePlatform system that we sell, which basically utilizes standard off-the-shelf Intel machine, is the one platform that is gaining share faster. We do see a lot of stability and very healthy business with our appliance, but -- with our appliance partners. And I hink Q4, based on the initial information that we know right now and it is really initial, was a very successful quarter for appliance partners. But still over the last 18 months I think they're using standard off-the-shelf Intel machine with SecurePlatform is the main platform that is gaining share.

And then just one final question. The guidance for the revenue for next year very strong, 585 to 600 million, and the consensus is 573 million. Is that all organic growth, meaning the existing product lines including Zone? Are you factoring in any existing additional acquisitions?

No, we're not factoring any additional acquisitions. This is our plan for growing the product line that we have right now.

Jeff Englander of Kaufman Brothers.

Just a quick question. Can you give us an update on the newer products -- I guess you could refer them InterSpect, Connectra, VPN-1 and EDGE on the progression they're making and your expectations?

I think all these products had a pretty good year for them. And all of them have moved from close to zero to becoming now a significant part. Every quarter we're struggling a little bit to try and find the right metric for the performance of all our emerging products. The metric that we have today, which by the way is a little bit different than the metric that we gave last time, between merging products and our core products is that the merging products are about 25 percent of our product sales for the quarter. That is 2 point drop from last quarter.

And just give you a rough comparison, it was about 10 percent last year. So it's moved to about 10 percent for the year to about 23 percent for 2004 and 25 percent for the last quarter of 2004, which I think is a very impressive result and a very healthy mix. And this is doing through the products that you're asking about, as well as (indiscernible).

Would you characterize that as above expectations, at expectations?

I think it's at expectations. We have been talking about this for I guess this is my fourth quarter now. And it is very, very much in line with what we expected, planned with the release of the new software, with the appliances, with Release 1.0 now, as I mentioned. 2.0 of InterSpect came out. We just released 2.0 Connectra. And it is being very, very well received in the marketplace. We're new. We're young. We are the early entrants, but with very solid products, with a very good reputation with our partners and our customers looking to adding more of our security technologies. So I think we're doing very well and have established a good market presence in both internal Web and Endpoint along with our core perimeter technology.

And just one other quick follow-up. In terms of the Zone product with the Windows desktop firewall, are you seeing, particularly with that making more noise on the antivirus and anti-spyware front, are you seeing any additional impact, or how would you characterize that?

So far the pattern we've seen with the more attention Microsoft draws to security the power users are also drawn to new products. And that has, in the past at least, a positive impact on our business. So I don't know how to evaluate it moving forward, but so far with all the Microsoft announcements on security we actually have seen a very nice trend on the consumer side of our business.

Katherine Egbert of Jefferies & Co.

My question has to do with the G&A expenses. Why were those down quarter on quarter in Q4, particularly (indiscernible) on like Sarbox compliance?

The question was why was it down?

Yes. Why was the G&A number down?

It was a little bit down. You know G&A is comprised of a lot of insurance payment and lawyers and accountants or whatever. So we pay a little bit less on insurance. Probably that is a major reason. Insurance prices have gone down a little bit. But no big differences. And beside isn't that the right thing to do? You spend more money on the things that create more business and revenues and try to save on people like me?

It sounds good.

That's what I thought too.

And what about the product mix in Q1, can you help us out with products versus services versus subscriptions, what that might be?

Q1?

In the quarter we just spent.

No, the current quarter. March quarter.

March quarter, sorry.

I think what we are -- first, I think we're going to have -- to continue to have good subscription and support numbers, because based on the deferred revenue increase that we had. So that is as expected. We do expect a strong quarter in terms of products too. But again I think the mix, the exact mixes are pretty hard to predict. The other thing I do expect to see a little bit more in terms of subscription and support, just building off the deferred revenue balance that we have.

Okay, that makes sense. We will see you in a couple of weeks. Good job.

(OPERATOR INSTRUCTIONS). Sarah Friar of Goldman Sachs.

Gil, if you look out into 2005 could you just talk about areas that you're particularly excited about in terms of growth? And are there any products holes you would particularly like to fill as you look through '05?

First, I would be very happy to share much more than that in February 7. In general, I think that we have very good strategy like that. And the last 6 months were actually very successful because we have seen only that the new merging products are gaining share, but also that we had a pretty good success with the core firewall VPN product. So as we enter into the next year we're very excited about that.

This morning we reviewed with our management team some of the plans for next year. And the good news is that despite the fact that I think we have a good and healthy and aggressive plan for next year, almost at any specific product which we looked at, all of us agreed that there is an upside there.

So while I don't want to create the wrong impression like there is a lot of -- like the numbers I gave right now weren't realistic, I think we're very realistic in terms of prediction. We do think that almost in each category if we execute right and if the market trends are right, we can have more success. Whether it is branch office gateways or Web security or internal security, or Endpoint Security and so on, each one of these markets if we execute right, we can do well in terms of the overall product mix.

So '05 sounds much more like a build on what you created in '04 year rather than when you went from '03 to '04? You really created brand-new segments, is that right?

Yes, we did create all these new basically 3 or 4 segments, and many new products and technologies. And while we have will have in the next few months new products, even newer products, those are just new versions coming up. I think the main growth in 2005 will be build on what we have started in 2004. And if we are -- and if we do have the right strategy, and right now we strongly believe that we do have it, I think it will be a build up not just for for one year, but it will be a build up for 2, 3 and 4 years in terms of building these segments and getting to much more impressive levels.

And then just quickly, Eyal, on deal sizes was this a quarter where you saw deal sizes go up? I know you normally give (indiscernible) of deals over I think 20,000?

Yes, we had very, very nice increase in deal sizes. The average has gone up a little. You know we have tens of thousands of orders that we process every quarter. So on average we are up. The large orders we categorize them over $50,000. We're about 27 percent of our business this quarter. I think this is the highest that we have had in a while.

And one of the reasons, by the way, is that we see that our EBS program is working. Our customers are consolidating their (indiscernible) orders. They used to place 3, 4, 5 times a year. Now they're placing one. So that is one of the reasons why that number is up. But we also have very nice products orders, large product orders that came from all over, and that increased the average.

Sterling Auty of JP Morgan.

I just want to dive in to the product versus the subscription service. Now the subscription, or service line, have been growing faster for a couple of quarters. We saw the product revenue kind of bounce back and grow faster this quarter. Is any of that from just kind of year-end budget flush, or is there any kind of trend that might be developing here?

Whether it is a year-end budget flush or not, I think we'll know in the future. I think generally we have been building a lot of large deals. And we were expecting those deals to come up, and we're very happy about that. So I amvery happy about that.

Keep in mind with the year-end we also got a lot of subscription deals. And we also got a lot of subscription deals, however, the revenue recognition for them will come in future quarters, and only a small part of it came in the fourth quarter. That is why we had such an increase in deferred revenue. So overall I think that if you look at the trend in the last 5 quarters, in the last five quarters the subscription line grew every single quarter. The license lines also grew every single quarter. And we expect -- I don't expect the product line to grow again in the first quarter sequentially, but I do expect it to be very healthy year-over-year. And I think that is the normal mix and the normal seasonality in business.

Sterlin, the large -- the strong product revenue that we showed in Q4 are not budget (ph) for us. If you look throughout the year product grew over a little over 20 percent year-over-year. So that's an annual picture, and it's not just something that has to do with Q4. I think that we've said all along that our focus is to increase product revenues, and we had a strong focus on that. I think that you can see that in the results. It didn't happen just in Q4. Look, throughout the year you can see that almost every quarter.

Michael Turits of Prudential Equity.

It is Michael Turits. A couple of questions. First, it seems to me as if the core business is doing very well. It seems as if it is accelerating. If I pull out some aggregated number for it, it looks like your core business actually was up somewhere around 11 percent for the year, obviously better than last year. You're guiding to 15 percent for next year, which is pretty close to apples to apples. So that is my first question. Am I right that in a core firewall and VPN business that you're seeing an acceleration to somewhere around the midteens in terms of growth? And what is driving that?

I think it is our positioning in the marketplace, Michael. We have done very well. We've talked about that for a number of quarters now. I have particularly emphasized it in my comments that in the enterprise market for our core technology, firewall VPNs, we are very well-established. It is the best security technology out there. Manageability, the fact that we you know added InterSpect and Connectra all dealing with the other issues that they have has really positioned us well in the enterprise marketplace.

I'm optimistic about what we're going to do from a product standpoint. I think -- we have a lot of -- Gil mentioned, and we will go into it in February 7th in more detail. We've got a lot of announcements we're going to be making this year to reinforce that point, to reinforce our position, to establish ourselves as the premier security vendor for the enterprise market for firewalls and VPNs. At the same time as we are moving into internal, perimeter and consumer and Endpoint. So it is a good story that is resonating very well with both partners and customers.

Is that market share -- is that just market share gain, or do you guys think the market itself is pretty much in line with what you forecast, the midteens?

We're taking market share besides. We have, and I think we'll continue to, but I think the market is going to grow as well. These are demands. I see it everywhere I go.

And what -- maybe I missed it, but you said it was a strong quarter for subscription signings. What really drove that? Was there catch-ups? Was it exceptional because there's some maintenance catch-ups or is it just seasonality?

Primarily seasonality.

Just seasonality? Nothing unusual, right?

No, nothing unusual. Actually if you look at the -- over the last year we moved -- since middle of Q4 of 2003 we moved to a new subscription program called -- enterprise based on subscription and support. And in that program we had a lot of catching up by customers throughout the year. In Q4 we actually got to the situation that was a very little for catch-up for customers to do. But there was a lot of renewals to do from Q4 of last year. And it works very, very well because you have seen -- at least on our internal measurement I think we've outperformed on that.

Last question is just, and again I apologize. I don't know if you guys answered this before. Do we see any foreign currency effects on revenues from you guys?

It is Gil. A very, very little as you know. Almost all our sales are -- are sold in U.S. dollars to our partners all over the world. So there is very little impact. There is some impact on expenses. Because we spend money in Europe and we spend money in Israel and both the euro, the sterling and the Israeli currency got a little stronger against the dollar. But it is not a big thing either way. So what I think our customers or partners in the non-dollar territories are enjoying the fact that their currencies are strong.

So if anything on EPS there was a slight -- it would have even slightly better on a constant currency basis?

Yes, I mean the revenues are dollars and the expenses are all currencies, so the impact of the currency changes last year in the world worked primarily against us.

(OPERATOR INSTRUCTIONS). Ed Maguire of Merrill Lynch.

You did speak about an increase in larger deals in the fourth quarter. I was wondering how much of the cashing (ph) you're seeing in some of your newer products comes in the form of larger deals that bundle some of your core products? In other words, are you able to use the strength in the core firewall VPN products to drive incremental uptake for the Connectra and InterSpect products?

I think we are using -- we are working with our customers, and our customers are very interested in the product. But I don't think it is being reflected in more and larger deals sizes, because it is existing large customers that now have a new deal. And by the way, when we see say deals sizes or order, actually count order. So we may have a customer that is buying 3 different products, and it would usually be 3 different orders. And we won't count it. The way we do it right now is one large dale, even though it may or may not be as part of one deal.

So I don't think that that has a lot to do with the increased deal size. Actually most of the most of the new products, what we're seeing is moderate sized deals. Because the way we work with customers in our practice is not to try and push customers to over buy. But rather to buy in small steps and get the first few products, and then get a little bit more, rather than be sort of traditional enterprise market or very, very large deals. We are almost the complete opposite than the enterprise software kinds of large deal trends.

Great. And just a quick follow-up. Just regarding the linearity for 2005, have you given some thought about what you would look for the quarter to quarter linearity to be?

It should be similar to 2004. I think in terms of seasonality and --.

That the addition of (indiscernible), which can shew the numbers from Q1 to Q2.

Exactly. And then we had three quarters of Zone Labs in Q1 we didn't have. So you can make that adjustment I'm sure. It should be similar. We know always that Q1 is a little slower starting year, and our guidance reflects that. Q2 should be stronger. Q3 reflects the summer, especially in Europe. And Q4 is always a strong quarter of the year. And I would believe that 2005 will not be very different, hopefully, on a higher level as we guided.

But we will be -- but there again we will be happy to share more of that on February 7th. And actually what we're doing is now taking notes and seeing what things you would like to know more in February 7, so we will be much more oriented towards the subjects of interest for you.

Vikram Kaura of TE Underberg Tobin.

Jerry, did the small, medium enterprise business perform to expectations?

Yes. Medium businesses continued to be very strong, and I think we're doing much better in the small-business. But I think they're both areas of upside. They're both areas you are going to see us continue to address in the first quarter of this year with new functions, new features, new products. But I'm generally pleased. I still think our issue on the small businesses, signing up and finding more channels that address that globally, some markets we have done very, very well with it, others we have not. But I expect us to continue to do well and continue to grow in those two segments.

Then one final question. You know SmartDefense service has seen nice uptake for several quarters now. Can you give us an idea of how many of your existing customers subscribe to that service, or at least a range?

I believe 10 to 15 percent, something with that. Am I right?

Yes.

But the nice thing is that it is really working very, very well. And as customers renew their software subscription many also sign up now for the SmartDefense service.

Israel Hernandez of Lehman Brothers.

Congratulations on a great quarter. Can you guys comment a little bit on the ramp in InterSpect, particularly since the release of the 2.0 and the Crossbeam (ph) appliance during the quarter? And given those two events, what do you think the ramp could look like for InterSpect as we move into 2005?

As you know, we did both of those towards the end of the quarter. I think Crossbeam had some initial success from what I hear. I see tremendous excitement. A lot of people are waiting for 2.0, so we see that reflected in the activity. But not necessarily in Q4 orders, but we will talk about it February 7. We will get into some kind of granularity there talking about those products and the opportunity we have for 2005, which I'm bullish on. And I think the market is and our partners are for both InterSpect and Connectra.

And quickly, I'm not sure if you answered this question already, with respect to the operating margins coming in at 58 percent, how much opportunity is left there in terms of maybe taking that number up to some of the historical highs?

I always tell you margins are not important. What is important is the ability to go top line, bottom line and earnings per shares. So it is not an opportunity. The opportunities are in the markets and not in the margins.

Theoretically there is 42 points left.

All right, wiseguys, congratulations.

And just (indiscernible) you don't go to that math class.

Maybe one comment. We said that after the acquisition of Zone Labs margin went a little down. And we started to build it up and we got to where we wanted it to be maybe a little earlier than what we told you in the past. So I apologize for that.

Gene Munster of Piper Jaffray.

Congratulations. In terms of the channel, obviously you guys are feeling good about the business. Has there been any basic changes in the channel aside from competitive that you guys have done, or is this just a function of the market, and all of your products starting to take traction?

I'm not sure I understand the question.

Have you made any changes to the channel in the last quarter that would justify some of the changes to the underlying business?

No, no really. We brought out our brand-new partner program, the new value-added program at the end of Q2, which we have been implementing and executing. I think we're just about fully converted on a global basis by now. The program is very positively received, but we spend a lot of time with the channel educating and working with them. And you know processes and it is paying off. I think they are very positive, very invigorated, and I think they're doing the a good job for us.

Sean Jackson of Avondale Partners.

Can you talk about the emerging product metric that you used? And was it a 25 percent of total revenue or license revenue?

Of new license revenue.

Okay, was this new license revenue? And the 10 percent number that you used, was that '03 or just the fourth quarter of '03?

That was -- I think the average for '03 was even either 9 or 10 percent for the entire year.

Okay. For the entire year. Now is that -- you said you sort of changed the metric a little bit. Now that is a little lower than what you said last quarter, wasn't it? As far as that was (multiple speakers) number, I know you changed the metric a little bit about.

Last quarter we gave too much (indiscernible) and one was higher, one was lower. And we decided that we avoid confusion in the future if we fix 1 metric that is slightly different categorization. In any metric that you look at the percentage changes and the point changes are very similar. And we tried to -- before we talked about these numbers, we have checked to see that we're not speaking in new numbers because it makes the numbers look better. All the metrics that would show the same gain and the same success there in the last year and the last few quarters.

Okay. Thanks for clearing that up. And lastly, can you comment on the percent of the revenue that came from existing customers, and how that compared to last quarter?

We don't that analysis. We always -- that analysis takes time to produce, and I don't have the numbers.

Okay. Now what is this -- might I may ask what it is historically though?

I don't -- we don't --.

We never really talked about it other than anecdotally, because it is really a trailing edge number when they look at our systems and our data.

But I mean let's remember most of our revenues -- because of the number up of customers that we have remember that most of the big enterprises are Check Point customers. And if you look at the Fortune 100, 100 of the Fortune 100 are Check Point customers. 95 percent of the Fortune 500 are Check Point customers. So when you are looking at the enterprise segment, please remember that almost every large vendor, every large company is a Check Point customers. Some of them may be very small Check Point customers, but still a Check Point customer.

We're picking up a lot of customers, small and medium and whatever. But remember we are getting a lot of new orders and new demand from our enterprise customers, but as Gil said, we have a lot of them. And that still is the highest percent of our business.

We will try to get an analysis for that for one of the upcoming meetings and share this. If I remember from my memory, we do have a few thousand customers every single quarter (inaudible). But again, we won't be Fortune 500 unfortunately, because there is (indiscernible).

They are all gone.

Chris Debiase of Smith Barney Citigroup.

One of the areas we haven't touched on today is Zone in the enterprise. So I was wondering if you can give us an update on how that is going with some of your channel partners and what the interest is from some of your larger enterprise customers?

What Gil said early on, that has been pretty well integrated now. As you know, we have always had client technology, SecureClient, SecureRemote. When we took the Integrity product, we have now integrated it. We have got a product called Integrity System on our SecureClient. We are going to do a lot more of that this year. And you have heard about out Total Access Protection initiative. So it is really hard to break out the Zone endpoint from our endpoint, because it is pretty well integrated right now.

So it is hard to answer that question for you. It is easier to see the consumer versus what we're doing. But has been good for us. Our customers love it. The fact that they have always had our SecureClient and now they can start putting this combined product combination of SecureClient and Integrity on their desktops. And I'm very optimistic about that long term. Is a great product and something that none of our competitors have.

Maybe one data point. About 40 percent of our Integrity revenue last quarter came from the channel. We expect that number to go to 100 percent. And we expect to move all the business to the channel. But it shows you within two quarters basically we have been able to train a lot of channels and make the customers and channel work together in a pretty effective way, driving that number up to 40 percent last quarter.

Nitsan Hargil of Friedman, Billings, Ramsey.

Just trying to get a better idea around your core products. Just -- it is hard to get the exact number but it appears as though you have had very slow growth in the core products in 2004, but yet you're expecting very good growth in 2005. Can you explain to us a little bit around was going on there exactly?

I think that we had a very good growth in core products in 2004, and we expect the same good growth in 2005. I don't see --.

I misunderstood because I saw such good growth in new products of from 10 percent to 25 percent of new license numbers, yet the overall growth of the Company -- that seems to attribute much of the growth that you have seen during the year. I was expecting base core products remained fairly static.

No, not really.

No, not at all.

Check the number again. It's not. We had very, very nice growth in core gross products in 2004, much better than in 2003. Yes, we expect this to continue into 2005. When you analyze you will see that very nice project. It was very, very well-balanced in terms of the gross coming from what we call the emerging product and from our core. And they were very well supported of one another. You have to also remember that a lot of the growth in subscription is coming from our core business, with renewals and with growth of subscription services of which we have a very large installed base. And you bring that into your calculation you'll see very nice growth coming into corporate.

Understood. I will just go back to the back of the envelope. Again, congrats on a good quarter.

William Becklin (ph) of Oppenheimer.

I'm just trying to square away in my head two numbers that were reported today. Juniper NetScreen reported a sequential growth this quarter of about 26 percent. And when you look at your license revenue it is up around 14 percent. And you are fundamentally saying that you are gaining market share based on evidence that you see out in the field. But those numbers are still somewhat discrepid (ph) with one another. Is that a question of product mix differences? How do you square those two and still feel you're gaining share?

All because they have their number declining for 2 quarters in a row. And now they're making up for 2 quarters that weren't going very well. I think that overall, both dollarwise, percentagewise our business grew better last year. But I didn't have the time to check it or to calculate it yet. But my initial indications I think that are clearly showing that. Not only that keep in mind that it seems based on the data that we have that most of the Juniper growth was a result of their new Carat (ph) acquisition. And if you take that out, either they didn't have that acquisition working well or they didn't have the core business growing at all. One or the other.

So number one is you spread over 4 quarters, and the second one is you take out the SSL VPN part of the business to get to the core firewall VPN business.

You got it.

If you look at software versus software and hardware, there's a lot of things you can do to really understand it.

And by the way, if you look at software and software (indiscernible) it also gives you a different picture (indiscernible). But even that isn't enough to (inaudible).

Philip Winslow of Credit Suisse First Boston.

Good quarter. Most of my questions have already been answered, but I would like to focus on just the mid-tier and the lower end of the firewall market. From just a macroperspective have you seen any changes in that area of the market?

Changes?

I mean are you seeing sort of an increased movement downstream from the larger enterprise to increased acceptance by mid-size in (indiscernible) businesses or there is a progression that you are seeing as well?

You mean the need for security?

Well exactly. Are you seen seeing that --?

Sure. Absolutely.

And then I guess looking also at the Zone Labs portion of the business, specifically its effect on deferred revenue, was there any impact on the -- from the write-down that you had last March, or potentially a renewal season and the December quarter that boosted that deferred line?

Most of it is already gone by Q4. No, and we didn't -- if you remember, we never gave this as an excuse to anything. There was a write-down. It happens in every acquisition. Our numbers are delivered after that write-down. And as I said, Q1 next year this is completely gone.

Great. Thanks guys.

Operator, we have time for one more question please.

Our final question will be coming from Rob Owens of Pacific Crest.

Could you guys talk a little bit just about the pricing environment? And as Juniper has gone through reorganizing their channel, what are you guys seeing on a pricing front out there? Is it staying pretty stable with traditional Q4, or is there any weakness there?

Very stable. It is hard to react to. I just haven't seen anything. I would get asked that every single quarter. But no, I saw nothing on the pricing front. No issues. I saw a very strong business with a very strong order rate at similar pricing to what we've always had.

And can you give us a sense on the linearity trend for the quarter?

That was a typical Q4 where the third month is always a little stronger than during the other quarters of the year, but nothing exceptional given our linearity. That's it.

Okay, thanks guys.

All right. Well, I would like to thank everyone for your participation on our call. If you want to speak to management or Investor Relations, call and give us a call. We're in our Redwood City office. So you can call Investor Relations Department at 650-628-2050.

We will be very happy to host all of you on February 7 in San Francisco, and share more details on the future of our business and our future plans. So we will see you all there. Thank you very much.

Thank you everybody.

Thank you. And thank you callers. That does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day.