Check Point Software Technologies Ltd (CHKP) 2005 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Check Point Software Technologies first-quarter 2005 financial results conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Eyal Desheh, Chief Financial Officer for Check Point Software Technologies.

Mr. Desheh, you may begin.

Thank you very much.

Good morning and good afternoon, everyone, and thank you for joining us to discuss the first-quarter results.

This is Eyal Desheh, Check Point Chief Financial Officer, and I will be your host today.

As a reminder, this call is being webcast live from our Web site and is being recorded.

To access the live webcast and replay information, please visit the Company's Web site at www.CheckPoint.com/IR.

The replay will be available through May 2.

If you'd like to reach us after the call, please contact the Investor Relations Department at area code 650-628-2050.

Again, 650-628-2050.

On the call with me today is Gil Shwed, Chairman and CEO, and Jerry Ungerman, Vice Chairman.

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 expectation for revenue and EPS in the future.

Other statements, which may be made in response to questions which refer to our beliefs, plans, expectations, or intentions, are also forward-looking statements.

Because such statements deal with future events, actual results could differ materially from the Company's current expectations.

Factors that could cause or contribute to such differences include but are not limited to the impact on revenues of economic and political uncertainties and weaknesses in various regions of the world, including the commencement or escalation of hostilities or acts of terrorism, the inclusion of network security functionality and third-party hardware or systems software, any unforeseen development or technological difficulties with regard to Check Point product, changes in the competitive landscape, including new competitors or the impact of competitive pricing and products, a shift in demand for products such as Check Point's, unknown factors affecting third parties with which Check Point has formed business alliances, timely availability and customer acceptance of Check Point's new and existing products, and other factors and risks discussed in Check Point's report on Form 20-F for the year ended December 31, 2004, which is on file with the Securities and Exchange Commission.

Check Point assumes no obligation to update information concerning its expectations.

Now, please let me share with you the results of the quarter and provide some more detail on the financials.

We posted good financial results for the first quarter.

Revenues were $137.7 million compared to 116.1 million in the first quarter of 2004, an increase of 19%.

Net income for the first quarter of 2005 was $73.7 million, an increase of 76% compared to Q1 last year.

Net income, excluding acquisition-related charges, was $75.8 million, an increase of 17% compared to $65 million in the first quarter of 2004.

Earnings per diluted share for the first quarter of 2005 were $0.29, an increase of 78% compared to last year.

Excluding acquisition-related charges, earning per share was $0.30, an increase of 18% compared to $0.25 in the first quarter of 2004.

Operating income, excluding acquisition-related charges, increased to $79 million from 69 million in the first quarter of 2004.

Deferred revenue as of March 31, 2005 grew to $150.2 million, an increase of $9.1 million over December 31, 2004 and an increase of $25.8 million over March 31, 2004.

Jerry and Gil will get into more detail on the reason for the growth.

Operating expenses, excluding acquisition-related charges, were $58.6 million for the quarter compared to 47 million in the first quarter of last year.

Just as a reminder, last year, operating expenses did not include Zone Labs.

Operating expenses were approximately $2 million down compared to Q4 2004, mostly as a result of seasonally lower marketing expenses and reduced costs of manufacturing and logistics, which are part of our cost of sales.

Cash collections continued to the good, resulting in Days of Sales Outstanding, DSO, of 49 days compared to 56 days in the first quarter last year.

As a result, we generated very strong cash flow from operating activities of 97.1 million, an increase of 50% over the operating cash flow (ph) generated in Q1 last year.

This is the strongest cash flow we've had in five years.

As part of our share repurchase program, we purchased 2.1 million shares during the first quarter at a total cost of $49.7 million.

Our effective income tax rate was 17%.

As a summary to my part, the first quarter marks a good beginning for 2005.

The revenue was well within our expectations and EPS was better than expected.

We generated a very good increase in deferred revenue, excellent profitability and strong cash flow and DSO.

Now, Jerry and Gil will speak more about the business and strategies.

Jerry, please go ahead.

Thank you, Eyal, and hello, everyone.

It's good to be with you today to discuss Check Point's business results this past quarter.

As you know, the 2004 was a very active year with product and technology introductions, and the first quarter of 2005 continued the trend with the launches of Eventia, Integrity 6.0, and Connectra 2.0.

Let me share with you their significance for our partners and customers.

Eventia is a new family of security event management solutions designed to help IT security departments reduce the cost and complexity of security event correlation, management and reporting.

The Eventia Analyzer, the first new product in the family, is a comprehensive security event management solution that automatically prioritizes security events for decisive, intelligent action.

Integrity 6.0, the newest version of our endpoint security product, forges new ground in manageability, scalability and reliability.

The Integrity client and server software secures all network PCs by centrally managing proactive defenses and enforcing access-policy compliance.

In addition, significant advances in new management features enable Integrity 6.0 to secure large-scale deployments with the lowest total cost-of-ownership.

It also includes the first easily managed, post-intrusion prevention for PCs.

The newest version of Connectra 2.0 was also introduced during first quarter.

In addition to the existing appliance version, Check Point is now offering increased flexibility with the industry's first software-based SSL VPN solution.

Feature highlights include secure browser and cash cleaning, endpoint host-checking, real-time security updates with SmartDefense service, and new platform options with Intel and AMD-based PCs.

While Eventia is a new product -- it was just introduced so there was no revenue impact in the quarter -- we did see an increase in activity for Integrity and an order rate for Connectra with the announcement of Version 2.0.

The fact that this new release of Connectra comes in both a software and hardware version and has new functions and features had a positive contribution to our results.

Based on current interest, we see this momentum continuing for all of these new products this coming year, as we continue to educate the channel and customers on the strength of our security architecture, security solutions and management infrastructure that can now centrally manage a broad range of layered security solutions, providing the best in-depth protection.

We also received some coveted awards in the first quarter.

Check Point was recognized by CMP's Media's (ph) VARBusiness magazine as one of the North America's top information technology vendors in terms of the breadth and depth of channel partner programs.

Check Point's valued partner program achieved VARBusiness' prestigious five-star rating, acknowledging the robust features of its program for IT integrators, resellers and consultants.

Three of the Company's security solutions were designated as the best in the industry by SC Magazine.

Check Point's leading solutions won awards in the following categories -- VPN-1 FireWall-1 Next Generation with application intelligence as the best firewall;

VPN-1 Pro Next Generation with applications intelligence as the best enterprise security solution; and the ZoneAlarm security suite was picked as the best small office/home office security solution.

The bestowing of awards validates the strength and superiority of our products and programs, and we were very pleased and honored to receive them.

Our first-quarter revenues were well diversified with the Americas leading the way, contributing 44% of revenue with continued strength in EMEA, as it contributed 42%, and due to some softness in the Asia-Pacific and Japan region, it only contributed 14% of our revenues this quarter.

During the quarter, we experienced good growth in our annuity-based revenue, as we saw strong demand for SmartDefense real-time security updates from our enterprise customers, the ZoneAlarm security services for consumers, and with our customers buying software subscriptions.

This is important, as it is a recommitment by our customers to Check Point as their security vendor of choice, as our subscription service gives them the ability to upgrade to new versions of our security technology.

We saw, across all geographies, a continued emphasis and level of business activity by our partners and from our customers to ensure they were covered by our subscription services.

This success contributed to our revenue achievement this quarter and also to the strong increase in deferred revenues of over $9 million.

In addition, we saw continued traction across or other major product families and initiatives, covering both core products as well as emerging products.

But as I mentioned previously, the strength this quarter was in the annuity-based revenues and geographically the Americas and especially our European region, as we continued to do well against a broad range of competitors.

The activity level remains high, the channel is engaged, and the opportunity for continued success, as we unveil additional new products this quarter, is positive.

Thank you again for participating in the call.

Now, I would like to turn it over to Gil.

Thank you, Jerry.

We started 2005 with a broad product portfolio and with many technologies and innovations from Check Point.

I'm going to report that the first quarter produced very strong results in our earnings and revenue growth.

I'm even more pleased to see the upcoming activities.

During the first quarter, we built a healthy backlog of new projects that we will work on during the year.

We saw a significant comes contribution to our results with some of our newest and most innovative annuity-based programs, the ZoneAlarm services for consumers and the very healthy growth of our SmartDefense subscription that deliver real-time security updates to our enterprise customers.

These two are especially interesting because they demonstrate the security leadership of our technology in an annuity-based model that should provide continued contribution to our results.

The second quarter is going to be a very active one for Check Point.

We're going to announce additional products in all of our major Check Point experience (ph) conferences for partners and customers in the U.S. and Europe.

As we look into the second quarter, we expect continued strong results.

I'd like to share our guidance for the second quarter.

Revenues are expected to be in a range of 142 to $148 million and earnings per share are expected to be between $0.29 to $0.30.

Earnings per share, excluding acquisition-related charges, is expected to be between $0.30 and $0.31.

With that, I'd like to thank you again for joining us on the call today and open it up for questions.

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS).

Chris Russ of Wachovia Securities.

A question about your deferred revenue increase -- it was up 9.1 million sequentially.

I think that's one of the best performances we've seen for any first quarter for Check Point.

Could you indicate how much of that was license revenue versus subscription and maintenance?

Chris, good morning.

The majority here is subscription and services.

It's comprised of our software subscription, our SmartDefense contracts, the ZoneAlarm maintenance contract and technical services and support to our customers.

As I said, most of this is subscription and services; the minority is licenses.

Okay.

One thing we hear back consistently from the channel is that the core business is doing well, meaning Check Point Express and VPNs from OneEdge (ph) and Check Point NG, etc., but that Connectra and Interspect are still struggling.

Could you give us any indication as to how Connectra and Interspect performed in the quarter?

I think they're both in the early-stage but overall they performed pretty well.

Connectra was actually showing nice growth and in the entire Web security area.

We are showing good traction with Interspect.

We are rolling out a new version of new products, so overall, we think we are developing a good pipeline for them.

In this quarter, the stronger one was the Connectra family.

Okay, and the release of 2.0 for Connectra, how important is that in your mind feel for driving additional sales?

Is it a significant improvement from release 1.0?

Yes, I think so.

I think it is one and it is one that I'm sure -- on top of many new features that exist there, a lot of what we had there was answering customer issues that the customer said, if you do that, then we will buy the product.

So hopefully that will contribute to the success of the product moving forward.

The other part of it, Chris, is not just the new features but also the fact that it's in a software version now also -- is a very, very well-received by both partners and customers.

They have the option of an appliance form factor or a software version.

Any final comments on the competitive environment vis-a-vis Juniper NetScreen, Cisco?

Any change there this quarter?

Not really, Chris, in my view.

I think we continue along;

I think we continue to gain share and do very well.

I think some of the same things I've said quarter after quarter are still playing out in the marketplace.

As you know, with our movement into a lot of these other areas, we now have new competitors and new competitive positioning, but think we continue to fare very well, and I'm very pleased with what I see in the marketplace.

okay, great.

Thank you very much.

Shaul Eyal of CIBC World Markets.

Good afternoon, guys.

Eyal, can you kind of quantify the contribution of new products out of total license revenue?

Yes, new products contributed about 28% of our total license revenue this quarter, compared to if, I remember correct, 25% last year, so we are -- (multiple speakers) -- yes, last quarter.

So we are improving there and growing according to our plan.

Fair enough.

When is the next opportunity you can go ahead and repurchase the remaining shares under the buyback plan?

We had a $400 million program approved.

Right now, we use almost 300 million of that, and we will probably continue throughout the year to use the available funds that we have in the program.

Fair enough.

With respect to the '05 year guidance, for the time, you are keeping it unchanged, as is?

Yes, we are keeping it unchanged at the moment, even though we are running on the high end of the EPS line for now, but there is no change at this point.

Fair enough.

Just a final one -- back-up (ph) expectations roughly for the second quarter?

Which expectations for the second quarter?

The deferred revenue expectation?

We don't have right now a deferred revenues.

I would say with our general guidance of plus/minus $5 million.

Because we had the very strong deferred revenue increased this quarter, I'm not -- I mean we haven't fully modeled (indiscernible) be the behavior next quarter, but I won't start with raising expectations on that.

So plus/minus $5 million should be still the range.

Jeff Englander from Kaufman Brothers.

I'm wondering if you can just give me a little more color on the weakness in Asia and is there particular areas (sic) you saw and anything you may be doing to address that?

It was across just about all of Asia.

I think that we probably had strength, if I can think through the sub-geographies in Australia, New Zealand, South Asia, I think it's primarily maybe Japan, China that we're not as strong as we had hoped for and looked for -- although we see a lot of activity and I see it picking up.

We are doing some internal things to try and address it; we're trying to expand and broaden our management team there and focus because it is a very big geography with an awful lot of opportunities, so I'm optimistic about what we can and will do there.

It just was soft this quarter but we are watching it, and we are managing the business there.

Was it more in the new products or in the core products, would you say?

It wasn't specifically one or the other.

I think it was just general softness that we saw in that region for the first three months.

One other quick question -- in reference to the previous question, you said that the new products are 28% of total license revenues versus 25% last quarter.

Would you characterize that -- it would seem to be a little bit below expectations.

Would you agree with that characterization?

I think we our expectation for the year was roughly 28, 29%, so reaching that on the first quarter means that we are slightly ahead of sales plan.

Okay, thank you.

Robert Breza of RBC Capital Markets.

Good morning and good afternoon, everybody.

I'm wondering, Jerry or Gil, could you comment a little bit on the product and licenses?

Obviously, the software subscription line was strong.

If I look at the product and licenses, it only grew 4% year-over-year and was fairly below my estimates going into the year.

What's the softness there or can you comment, given the relative strength of the new products?

I think it's a combination of two things.

First, a lot of our customer budget bids (ph) will go into the subscription program this quarter.

It's a good start for the year, when customers are putting all of their accounts under subscription and hopefully they are now ready to spend the rest of their budgets throughout the year more on product, at least for those who purchase the first quarter.

The other is we did see a very nice increase in the new services and even though we are characterized as subscription, they are new, they are important.

These are including, on one hand, the home users' consumer market with ZoneAlarm, but even the bigger impact is the SmartDefense security services.

The software (ph) customers do subscribe to the SmartDefense service.

I think it's a very good one and it's also a very good business model, because unlike if we would chose to market this, let's say it's an IPS product and have a one-time (indiscernible) customer (indiscernible), this way we get an annuity business model, the customers do get their real-time update from Check Point, they maintain a much more secure environment.

We did see a very nice increase there, so even though we don't count in the new products and we don't count it in the license or in the new license revenue, subscription license, it did have a good effect on the quarter and was a contributor both to revenues and to deferred revenue.

I agree.

I would say it is a product.

You know, it's put in that category, but Gil is right on the other point, Robert, that I saw a lot of, which is the budget dollars being spent on services side, or the subscription side.

Because the activity remains very high, I think a lot of people talk to a lot of the channel partners that are very busy across all of the product areas and they are doing very well.

It's just a matter of what did the purchase orders coming from?

We were very pleased to see such a significant increase in the subscription side, and I think a lot of customers are positioned for what we're going to do this year with the new products, new introductions that they are going to be upgrading during the course of the year.

So that's where we saw budget dollars now and we will see it flow into the product line as we go forward in the near --.

Just one quick follow-up -- if you look at the software subscription line and obviously the new services you've introduced, have you made any other changes I guess on the subscription offering, meaning have you increased the percentage of revenue (ph) that you charge for maintenance on the core products, or has there been any tiering of new programs that you've introduced to help drive the subscription services?

No, the prices remain the same.

Unlike many average software (ph) products, we don't raise the subscription price every year; we keep it constant based on the account size.

We didn't introduce any changes that I can see close to the subscription programs this quarter.

Todd Raker of Deutsche Bank -- and we do ask our participants, in the interest of time, to limit their questions to one each.

Hi, how are you?

Can you hear me?

Yes, we can hear you.

Can you guys give us a little bit more insight on the strong subscription number?

Can you talk about the penetration into the current customer base, or the attach rate and what you're seeing on the renewal rates?

Are we likely to continue to see this side of the business outperform over the course of the year?

We got the pretty nice coverage rate for our install base, even though we still have a lot of upside of coverage but it's not properly covered.

I think that, within our large customers, we are very high on the coverage rate.

Within small/medium-sized accounts that we have, the coverage rate is relatively -- I mean, at least our standard is low; it can go between -- it's basically running from like 50, 60% to 80, 90%, based on the size of the account.

We just completed a recent survey amongst customers who didn't have subscriptions, and we asked them for the reasons for that.

In most cases, we found that customers weren't aware of (indiscernible) covered or (indiscernible) covered when we weren't, which is a good sign because that means if we communicate better with them, we actually have a way to upgrade a little bit.

But given that this area is performing very well, I wouldn't say it necessarily raised the expectation, because we are very well.

Renewal rates are high, close to 90%, so I wouldn't necessarily rate the expectations there and I think we should do more throughout the year in selling more new products, which will have the impact on both the subscription and the product side of the business.

Okay, and then one quick follow-up -- can you guys quantify the consumer revenue stream associated with ZoneAlarm today?

No, we don't break it separately.

Would you then talk qualitatively about the relative growth rates?

Are you seeing stronger growth in SmartDefense or stronger growth in the consumer side of Zone?

Last year, we saw stronger growth with SmartDefense, even though the consumer side has grown steadily, quarter over quarter and this quarter was better than Q4, so we are pretty happy with that behavior of the consumer in the last four quarters.

SmartDefense is doing very well, Todd.

(OPERATOR INSTRUCTIONS).

Michael Turits of Prudential Equity Group.

The product mix was down below 50%.

Are you still sticking with your 54% product or license mix for the year?

Also a question on core demand for the core firewall VPN products, which was strong throughout last year -- how do you see that going this year?

Right now, we are not changing the model for next year.

As I said, I think we are running a little bit on the high side of the EPS, but at this point, we are not making any changes to the model for the next year.

I think our team people are pretty optimistic about the projects as they work across the line in both products and in other parts of the business, so overall, I think we are pretty optimistic about the year.

On the core firewall VPN demand, does that continue to be strong this year?

Any sense for what that growth rate could be like?

We have a large number of core business projects, so as I said I don't think that we want to change anything at this point in the year.

Gregg Moskowitz of Susquehanna Financial Group.

Thank you and Good afternoon.

I'm wondering if you guys can give a little more color on the updated or next version of the firewall VPN product in terms of timing of when that might be released in the Q2.

Then also, will that upgrade be included as part of a customer's (indiscernible) and will pricing be any different for new customers?

We expect the next major version of the VPN-1 Pro and all of our major product suite to come pretty soon, I would say differently within the next two quarters.

I don't want to give a specific date here, but we are ramping up activities there quite nicely.

Upgrade for customer under subscription will be a no-charge, so they will be able to upgrade with no charge. (multiple speakers) -- if they have value subscriptions, which many have, so overall, we are expecting a lot of activity around that, and we are seeing -- we are starting to see the activity already there, especially if our sales force has already started training on the new version.

So far, the reaction that we're getting from the early (indiscernible) and from our sales engineers are very positive.

The new features and the new things that we are including are directly on target on what our customers are expecting.

Then Gil, is that possible that, as some of those customers who were kind of getting an early peek at the product and sort of knew that it was on the horizon -- is that possible that maybe held up some of the core firewall VPN sales this quarter as they are looking forward to the next version?

It is possible, but I don't want to speculate on that too much.

Maybe just one final question -- now that Integrity 6.0 has been out for a few months, any insight into attach rates of the program adviser service, that new service on the Integrity product?

Integrity 6.0 was actually announced two months ago but actually started shipping only a few weeks ago, so it started shipping towards the end of the quarter, so it's a little bit too early to talk about that.

I think I've seen some revenues of the new SmartDefense program adviser subscription to that, but it still was -- which is a good sign because it didn't ship for a very long time -- but it's still in a very small percentage and obviously it (indiscernible) impact on the revenue line last quarter.

Walter Pritchard of S.G. Cowen.

On the 54%, I guess the guidance for the year is 54% of revenue from new products.

What would you say for Q2?

Do you expect the mix of new products to be closer to 54% for the year?

I think 54 was for overall product, not for new product.

The new product -- (multiple speakers).

I'm sorry, yes, for license.

I don't know.

I don't think that Q4 will jump or that Q2 will jump all the way to this percentage.

I think we expect that, later in the year, probably we will get closer to that towards Q4, which is -- last year, we've seen that this was a very strong product quarter.

Again, we haven't (indiscernible) down all of the financial modeling to say exactly where we stand on that, but just from a qualitative feeling, that would be my feel about that.

Then Eyal, any maintenance catch-ups in the quarter that were more significant than the past quarters?

No.

Adam Rashid (ph) of Eminence Capital.

(technical difficulty) -- explain that in a little more detail, and are you seeing some kinds of spending that might have previously been reported in license revenue shift to subscription revenue as customers -- I don't know -- maybe expand their subscriptions to those new products?

I think we may have missed the first part of the question, so if you can repeat it?

Okay, you know, you mentioned that customers were spending more of their budgets on subscriptions rather than products.

Then you also mentioned that some of the new products, customers can gain access to them by expanding their subscriptions.

So maybe if you could talk about -- does that change how you report revenue?

Maybe some of it shifts from the product line to the subscription line?

If you could give us a little bit more detail on that?

First, customers can get access to new versions, not to new products.

If they have the old version of a product, if they can get the new version, the new version usually has a lot of new functionality but it is separate from completely new product.

I don't know if there is a huge change in behavior; what I do know that you have -- when you renew your subscription, you have a timeline to do that.

I think, with this quarter, we saw that more customers were trying to do that.

I also heard a number of large customers that have a big subscription contract to renew that says, we want to get the subscription contract out of the way, to complete the subscription agreement and in Q2, we will be ready to do a major new project review and actually even maybe the conditions that we come to all the terms on the subscription so they can move to the next phase, which is a major purchasing project.

So I think, overall, our subscription policy hasn't changed; it's the same policy.

A year and a half ago, we implemented the change in the EPS program, and in the last three, four quarters, we consistently saw that even though this brings a great benefit to customers because it lowers our rate, it also works very well for Check Point because it increased the coverage percentage and increased dramatically -- increased nicely the amount of dollars that we are actually getting from subscription contract and this quarter was no exception.

Nitsan Hargil of Friedman, Billings, Ramsey.

Good morning, guys.

Regarding the VPN-1, the VPN and firewall, obviously it went down to 25% -- to 75% of overall revenue and down a little bit more than we expected.

You'd previously told us that you would be up somewhere in the single digits on that for the year.

Is that still a good kind of number to stick to or is that still going to be an up number of the year do you think?

Yes, we expect -- I don't know exactly your division about the 75%, but generally we expect VPN-1 and the core product that we have to grow in the 2 digits growth rate for the year, and there is no change (indiscernible) plan at this point.

Okay and one other question -- regarding your guidance for next quarter, given the revenue number you gave, my model would come up with EPS that's a couple of pennies above the range you gave.

Is there some inconsistency on the expense side or the tax side that is different from previous quarters?

No, I think our spending model is fairly consistent.

We've been very, very consistent in spending if you look at Check Point throughout the year.

We don't expect any changes in tax rates or in any other unusual expenses.

We actually expect the Q2 expenses to be slightly higher than the Q1, and if you exclude the acquisition charge, it's expected at $0.30 to $0.31.

Ed Maguire of Merrill Lynch.

Yes, good morning.

Could you comment about any areas where you believe you might be gaining market share in terms of segments or specific products?

Ed, it's Jerry.

I guess it's easy on two areas, and with Connectra and Web services, we're gaining market share and with internal security we are gaining market share, because those are brand-new businesses for us and very strong.

But I think the key thing is, in our core market, I think we continue to do very well relative to anyone else.

So I think, across the right now, as you know, we're very small in both internal security and Web security.

We've continued with IPS products or SSL VPN products, but all of the business we're doing is gaining market share there from somebody else.

Then we're still the clear leader, both with endpoint security and with the core perimeter firewall products, and I think doing well there.

Just a quick follow-up for Eyal -- any thoughts about treatment of stock option expense and when we might look for guidance for the second half of the year?

Well, first we got an extension, as you probably know, so it wouldn't start before January 1, 2006, but you saw, on our 20-F which was just recently filed, our stock-option expenses.

We had to expense, it would've been about $43 million for 2004.

I expect this number to be a bit higher for 2005.

Again, it would not be an expense; it would be a footnote.

And 2006, let's wait a little.

William Becklean of Oppenheimer.

I don't want to beat a dead horse, but the shift in mix between license and subscription revenues between the fourth quarter and the first quarter was pretty dramatic.

Did you expect that? did it come as a surprise?

Were there policies put in place the caused that to happen?

Have those policies changed?

How would you expect to see that going forward over the rest of this year?

We didn't change any policies except the change that we did a year, a year and a half ago, with regard to the new EBS program.

I think that shifted a lot more to be renewed now, because customers renew their entire account at once and not product by product.

I think we are -- I think we will see a higher product for bookings of revenues throughout the year, and I think that our expectation to see (indiscernible) product.

But I think what we've seen is that Q4, customers were really -- we had a very nice upside there of new projects and new products.

I think, in many cases, customers were just digesting that and as we move to the first quarter, I think we are starting a fresh year and will also see the progress on projects.

I think what we've seen overall in the past few years is that our customers are shifting to do larger and larger projects with us, and larger projects you usually don't complete in the first quarter of the year.

Still, comparing us to enterprise software companies, our feelings are our mix is wonderful, we have the highest product percentage, we are not back-end loaded, we are the extreme of not being back-end loaded compared to most enterprise software companies.

But I think, with the increased installed base, with the bigger projects, with the bigger products that we have, we will start to see the average shift consistent with the rest of the software industry.

We don't model our four quarters to be identical on the splits between all of the businesses.

We know there is variability; we know there's seasonability; we know that there's unevenness in how this happens, so we look at the macrolevel and revenue as, Eyal said early on, was well within expectations and EPS was above our expectations.

So, we're pleased with the overall results and what we saw and what we see between activity and actual POs.

Vick Cara (ph) of Unterberg Towbin.

Good morning.

Gil, can you talk about the recent price cuts in the Integrity and the Integrity secure client product and how should we reconcile that with your statement that the internal security products are doing really well?

It wasn't a real price reduction on the Integrity secure (indiscernible) product.

What was (indiscernible) is the adjustment of the pricing.

The difference is the shift in the sales model.

We moved on Integrity from a direct sales model into a channel-based sales model and through that, we had to do adjustments to the pricing to accommodate the channel.

We don't expect the ASP of Check Point (indiscernible) product to change.

We've actually seen some nice upside on the ASP on those, so I mean, what we've seen on the price list, not that the price decrease or price increase means much.

Price decrease may mean expanding to a much broader opportunity.

I don't think that, generically, you should make any statements about price increase or decrease at this time or say strength or weakness, but to (indiscernible) what we've done was realigning the products to match the new sales structure with the channel.

Do you think this realignment is complete, or should we see similar shifts going forward?

I think what you'll still see is some more realignments, because I believe that we are in the very early stage there and the percentage of sales that we see right now from these products is fairly small, so I think as we learn more about the sales pattern by the channel, what's the real customer ASP, the new functions and feature that we add to this product, we will see more and more pricing realignment for these products.

Sarah Friar of Goldman Sachs.

Just to go back to a more macro question, could you try and compare the spending environment this quarter compared to how it felt going into 2004?

The reason I ask is there (indiscernible) a lot of concern out there that tech demand is slowing.

Could you maybe give us some color around that?

Then to the extent you can, how does it compare large enterprise spending versus maybe more the small/midsized enterprise markets?

Thanks.

I don't know that I have the full analytical data to look between all of these but generally, we finished '04 with very strong results, so I don't know that we don't have to wait a few more months or a few more quarters to assess the real spending environment of 2005.

The pipeline that we have and our salespeople are fairly happy with the amount of projects and the activity that they are seeing, but how much of that is translating into a very strong year or to a reasonable year it's too early to say at this point in the year.

In terms of the different market segments, again, I don't know that I necessarily have the full breakdown.

We did see an increase in large orders between last year to this year, between Q1 last year and this year, which I think is a good sign.

Part of it is subscription EBS contracts; part of it is products projects, so I don't know exactly how (indiscernible) change between the mix.

I think that, on the small business sale opportunity, we still have -- I mean, in small business, we still haven't captured that market, even though our new (indiscernible) wireless products we've seen pretty nice sales this quarter and it was slightly ahead of our expectations.

We are not really yet addressing this market in a large way.

In the medium-sized business, we haven't talked much in this call about that, but we just launched last week the Check Point Express CI, content inspection, that is now the most comprehensive solution for mid-sized businesses, by far outperforms any vendor that calls themselves UPM vendors or anything like that, a product that has in it embedded antivirus for HTTP and e-mail; it's a product that offers far-superior intrusion-prevention capability to anything in the market.

While the product is only going to ship this week or next week, I think it is going to address more and more needs of the medium-sized customers.

I refer all of you, by the way, to go to our Web site and look at the (indiscernible) group report that talks about Check Point superiority in terms of security, that shows that, out of 17 common (ph) attacks on the Internet today, Check Point address all 17 with one product and our competitors hardly address 1.

It shows that our total cost of ownership and the purchase price of our product is lower than the competition, so I think we're positioned very well and we need to execute there because we have a lot more value coming to midsized customers that are looking for that.

Gil, is your expectation that the medium end of the market will maybe provide more opportunity this year than large enterprises?

I still think that our strength and -- (technical difficulty) -- is not smaller in the enterprise customers.

Enterprise customers do have their needs.

We do see strength in Check Point.

Check Point is clearly the only vendor that can address the management's needs and the scalability needs that large enterprises have, so I think that we both have an opportunity and it's up to our execution to see which sector will grow faster than the other.

Todd Weller of Legg Mason.

My question has been answered.

Chris Debiase of Citigroup.

a little bit of a follow-up on Sarah's question -- we've been hearing a lot about European weakness in the quarter -- I know Europe where you came in pretty strong.

Any thoughts on Q2 and Q3, which are normally the European slowdown as we head into the summer months?

Usually, Q3 is the weaker quarter in Europe but as far as Q1 went, well, I think we've seen nice results from Europe.

Europe has been consistently with us a very stable market and a very consistently well-performing markets.

The strength of the euro over the past year is clearly helping the European customers that now have more buying power, and I think it's helping our partners and resellers in Europe to generate bigger profits and bigger margin, which in turn helps them investing more in the business.

So right now and again, I'm not -- I mean, I'm not into too much looking into the different economic environments in the different quarters, in the different regions of the world, but right now, Europe is performing pretty well for us.

I agree with Gill.

They have done and continue to do very well, and I have no concerns about them not other than maybe we will hit the same seasonality we do every Q3, but other than that, there's nothing going on any different there than has been, so I'm pleased with our business in Europe.

Gene Munster of Piper Jaffray.

Just to kind of recap in terms of what you're seeing regarding I guess Zone related to Microsoft, I guess you've been competing now three quarters since SB2 (ph) has come out.

How would you kind of -- what's the state of the union in terms of competing with SP2 and the impact on Zone's business?

Thanks.

I would say SP2 is not an issue.

I think it's not a factor in the marketplace; it is not a factor in -- with our transactions or what we're doing, either at consumer level or enterprise level.

I don't think it materializes a competitive threat.

How about in terms of just the -- has the number of free downloads from Zone been increasing since SP2 has come out?

Any thoughts on that front?

Yes, the number has been increasing but not sure that this is directly related to SP2.

We see increase in the number of free downloads and we see increase in the number of free downloads converted to paid-for licenses and number of paying licenses and renewing licenses is growing, as we've talked about.

The consumer maintenance is a subscription fee which is growing all the time, so we are ,you know, the smaller player in this market and growing pretty fast and I'm not sure that Microsoft right now is a factor.

Gene, I really think it's -- I don't -- it could be, I don't know, we don't know enough but I can tell you that with the recognition we get, with the brand-awareness we have, with the awards that we're getting as the best security suite and the top-quality product, I think is more important than anything Microsoft might have done or not done very well.

Excellent, thank you very much.

Sean Jackson of Avondale Partners.

Yes, a quick question on the platform.

I think you mentioned last quarter that the software-based platform had relative strength versus the -- using some of the hardware partners.

Is that the case again in the first quarter?

I think we saw a continuation of that.

I don't know.

Maybe Gil has some data, but I think that trend is very much intact and is continuing on.

You know, it's one of the strength we've had, Sean, is the fact that we do both and allow both, that freedom of choice by both the partner and the customer has proven very valid.

You see fluctuations but right now, secure platform is very well received and accepted in the marketplace, and a number of our platform partners continue to do very well.

It's all about providing the best total cost-of-ownership and the best solution, which is broad.

It's functions; it's features; it's performance; it's logistics; it's support, so that variety of choice is very well received in the marketplace and I think we have a broad platform on which we are executing to.

The mix of platforms was very similar to Q4.

Just the sales of the Nokia platform, how much was that during the quarter?

It's about 30% of licenses are on the Nokia platform.

We have time for two more questions, operator.

Daniel Cummings of UBS.

I wanted to ask a question of Jerry but I just also wanted to point out, maybe Eyal can come back to this -- your option grants were up last year quite a bit from their three-year average.

I'm wondering what that was about, perhaps the Zone acquisition.

But my question was for Jerry and your ascension to the Board.

Is your day-to-day role changing significantly and with your responsibility over the partner network and I presume the channel, I wonder if you could comment what Check Point might be seeing with respect by some real big stepped-up efforts by Cisco and Juniper to buy some share in the channel using their balance sheets?

I will give you the answer on the options, then Jerry can talk about Jerry, but the option, you're right.

We granted very similar numbers over the last two to three years.

The only difference in 2004 was the assumption of the Zone Labs stock options, which were about 2.8 million.

If you dig into our 20-F you'll find that number somewhere.

That was the difference.

There's no real change in our -- (multiple speakers) -- option grant policy, at least not in 2004.

Jerry?

Dan, about me, I don't know anything about Cisco and Juniper;

I don't see that in the marketplace, them using their balance sheet to acquire partners.

That would be a pretty tough task for them and pretty expensive.

I don't know what they're doing or what they're thinking about doing, but that's not a competitive threat I see.

What my real change is -- and I don't use the word "significant" -- I don't think it's going to be significant, but it's really the convergence of two issues that are both very similar in nature.

One was my personal desire and the other one is a business opportunity that I now get to spend full-time on what I enjoy doing the most and where Gil and I think is of value to the Company, and that is to spend all of my time and efforts working with our channel partners and with our large customers.

It's what I've done and what I have loved to do and now I get to focus on it full-time.

So I don't think it's going to change what I do on a daily basis.

From an impact standpoint, I'm going to still travel extensively;

I was in Zürich last week;

I've been in Israel all this week;

I'll be in France next week;

I'll travel in May, so I'm going to just -- it's just a matter of me doing what I wanted to do, which is to spend a lot more time with our partners and customers.

Our belief as a company that that will be time well spent -- because as we've expanded beyond the enterprise in the medium business, small-business, consumer marketplace and as we've gone from perimeter and internal Web, there's a lot to do out there and the channel has always been very important to us and I'm taking that on as my full-time responsibility to ensure we continue to communicate, grow and work with our channel.

Are any of your former responsibilities being assumed by people coming in from the outside, or being significantly promoted or anything you can tell us about?

Well, you all new that we bought in a worldwide sales VP almost a year ago now, nine months ago now, and he's come on very, very well, took over four of my direct reports, and you know, we've dealt a very strong management team and we've got a really good group of people that are executing very well, and they now work for some combination of Gil, Marius (ph) and (indiscernible) on a direct basis.

Okay, thanks.

Horatio Zanbrano (ph) of Wedbush Morgan Securities.

Thank you.

Guys, can you tell us a little bit about your large-scale metrics that you've given in the past deals over 50K?

Are you seeing larger deals with Interspect now?

There was some comment from the channel on some larger deals this quarter.

Could you tell us any color on that, give us any color on that?

I can give you the metrics and Jerry can -- Jerry or Gil can talk about the business itself.

But basically, we have a nice number of larger deals over 50,000 K (ph) this quarter, bigger than any of the quarters in 2004, other than Q4.

That was about 24% of our business we generated by the large deals, so I think there's a pretty good, a pretty healthy number and evidence of strength and a balanced business in the market.

Regarding the (indiscernible) Jerry, large Interspect deals and large -- (multiple speakers) -- deals.

We've talked about that the last couple of the quarters -- (multiple speakers) -- we are seeing, especially in Interspect, larger and larger deals and products than what we had expected or envisioned.

I think it's more true of Interspect than it is of Connectra right now.

We see that continuing and I hear that from the channel; you probably heard it from the channel, that they are working on some very, very large opportunities and it's very pleasing, and we're doing very well in there, especially as we continue to bring out newer versions of it that contain more functions, more features and make the product more mature.

It is the product; it is centrally managed; it is scalable and I think it fits their needs better, so we're pleased with that and I think that will be part of the success we see as we go through 2005 as the winning and booking of those transactions.

Okay.

Can you comment on Total Access Protection and how much that's helping sort of drive sales?

Is it sort of more of a feature for your all of your products that adds overall value?

I know that Cisco has continued to talk very aggressively about network access control.

Just in general, how good is your channel telling that story?

How much of an impact is that making on customer decisions today?

We hear excellent feedback on the Total Access Protection initiative.

It is focused mainly around the endpoint but how the endpoint connects to the rest of it.

I think our salespeople in channel still have to learn a lot about how to do that, how to translate that and mainly how to track that into sales, because so far, we've started converting projects that before were direct sales (indiscernible) used to do into projects that are going through the channel.

We did have some major wins this quarter, but mainly this still is -- still would be in the pipeline stage that will come in the future.

So overall, if I look at the feedback I'm getting on Total Access Protection, it's a pretty good feedback.

I would just add to Gil, I think he's right; there's more educating to do because a lot of our channel had not been involved in the endpoint but the story resonates much better -- (technical difficulty) -- content than the Mac program, whatever that is.

Well, okay.

Well, thank you, everyone, for your good questions and for participation.

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Ladies and gentlemen, this does conclude today's teleconference.

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