Check Point Software Technologies Ltd (CHKP) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Check Point Software Technologies second quarter 2005 financial results conference call.

At this time all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation.

It is now my pleasure to introduce Ann Marie McCauley, Director of Investor Relations.

Ma'am, the floor is yours.

Thank you, Jackie.

Good morning, and good afternoon.

I'm Ann Marie McCauley, Director of Investor Relations for Check Point.

Thank you for joining us to discuss the second quarter 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 August 2nd.

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, Vice Chairman; and Eyal Desheh, Executive Vice President and CFO.

Before we start our management presentation I would like to make 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.

Large license orders, plans for emerging products, plans for the third quarter generally, and our continued success as a provider of security solutions.

Other statements which may be made in response to questions which refer to our beliefs, plans, expectations, or intentions are also forward-looking statements for purposes of the Safe Harbor provided by the Securities Litigation Reform Act.

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 connections for escalation, hostilities or acts of terrorism; the inclusions of network security functionality and third-party hardware or system software; any unforeseen developmental or technological difficulties with regard to Check Point's products, changes in the competitive landscapes, including new competitors or the impact of competitive pricing and products; a shift in demand for products, such as, Check Point; unknown factors affecting third-parties with which Check Point has formed business alliances; timely availability and customer acceptance of Check Point's new and existing products, including NGX based 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 obligations to update the information concerning its expectations.

Now, let me turn the call over to Eyal Desheh for financial review.

Thank you very much, Ann Marie.

And welcome to Check Point.

I would like to take this opportunity to thank Janine Zanelli for seven years of hard work and dedication as our Director of Investor Relations.

Now, good morning, and good afternoon, everyone.

Let me share with you the results of the quarter and provide some more details on the financial.

Because of good financial results for the second quarter, revenues were $144.6 million, compared to 126.9 million in the second quarter of 2004, an increase of 14%.

Net income for the second quarter of 2005 was $78 million, an increase of 23%, compared to $63.3 million in Q2 last year.

Net income, excluding acquisition-related charges was $79.8 million, an increase of 21%, compared to 65.9 million in the second quarter of 2004.

Earnings per diluted share for the second quarter of 2005 were $0.31, an increase of 30%, compared to $0.24 last year.

Excluding acquisition-related charges earnings per share was $0.32, an increase of 28%, compared to $0.25 in the second quarter of 2004.

Operating income, excluding acquisition-related charges, increased to $83.3 million from $68.7 million in the second quarter of 2004.

As a result, operating margins increased to 58% from 54% last year.

Deferred revenues as of June 30, 2005 grew to a record of $154.2 million, an increase of $4 million over March 31, 2004 and an increase of $24.2 million over June 30, 2004.

In the second quarter, our large orders, which are greater than $50,000 per order, accounted for roughly 30% of total orders.

This was driven by a few licensing orders over $1 million.

As always, part of this business was recognized this quarter and part will be recognized over future quarters.

While order of this magnitude may fluctuate due to many factors, we do expect that this trend will continue for the next few quarters.

Operating expenses, excluding acquisition-related charges was $61.3 million, for the quarter compared to $58.2 million in the second quarter last year.

Operating expenses increased by approximately $2.7 million, compared to Q1 2005, mostly as a result of expenses related to partner marketing activities in our Check Point Experience events for customers and partners.

Cash collection continues to be good resulting in days sales outstanding, DSO, of 54 days, compared to 48 days in the second quarter of last year.

As a result, we generated strong cash flow from operating activities of $84.9 million.

Also, our cash and investment balance at the end of the quarter was a little over $1.6 billion.

As part of our share repurchase program we purchased 4.7 million shares during the second quarter at the total of cost of close to $103 million.

Following the completion of the current program we intend to evaluate an additional buy-back program.

Our effective income tax rate was 17%.

As a summary to my part, the second quarter continues the positive performance momentous of 2005.

Revenues were well within our expectation and earnings per share was better-than-expected.

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

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

Jerry, please go ahead.

Thank you, Eyal, and all, everyone.

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

Continuing the trends of 2004 and the beginning of 2005, the second quarter was very active with product and technology introduction.

During the quarter we launched our new major release of NG and introduced Check Point Express CI and Check Point VPN-1 Edge W. Let me share with you their significance for our partners and customers.

The first of these three key announcements is NGX.

NGX is the industry's only unified security architecture.

The NGX platform is a major upgrade to Check Point's core technology.

It is the unified security platform for perimeter, internal, and Web security solutions that enable enterprises of all sizes to reduce the cost and complexity of security and ensure that their security systems can be easily extended to adapt to new and evolving threats.

Since introduction over 4200 licenses have been issued for NGX.

The second announcement we made this quarter is Check Point Express CI, our unified threat management solution for medium businesses which is an easy to deploy and manage platform that comprises a number of key security technologies of mid-size business needs, including firewall, VPN, intrusion prevention, and integrated antivirus protection.

And the third announcement was for Check Point VPN-1 Edge W, an enterprise class VPN/firewall wireless security appliance for remote site business locations, branch offices, and partner sites.

The Edge solution provides flexible high-speed wireless access, unmatched security protection, simple and scalable management, and business continuity.

These new products are important for our partners as they allow them to effectively work with our customers and provide them with quality security solutions in dealing with a growing and emerging threats they are facing today.

Another benefit of having this advanced level of security is that it provides greater adherence to regulatory compliance requirements than those offered by competitive solutions.

In addition, it gives our partners important revenue and margin opportunity by providing them a broader solution set of products and services they can utilize with our customers.

Also, during the second quarter we had a number of business highlights that I also want to share with you today.

The first is regarding our ongoing events to communicate our strategy, vision, and new products to our partners and customers.

This quarter we held two major events, one for our partners and customers in the United States, and the other in the Europe, Middle East, and Africa region.

The purpose of these premier business and networking events is to educate users and partners on Check Point solutions.

This quarter over 1700 partners and customers participated and benefited from valuable technology and market information by our presentation, product demonstrations, and roundtable discussions with key development personnel.

In addition, we achieved industry leadership position and META Group's METAspectrum report on Network Intrusion Control Systems.

Of 12 vendors, Check Point ranked the highest for "performance," a category that takes into account the Company's technology, services, pricing, and financial standing.

We also were very pleased to receive a number of important awards in the second quarter for the quality and capability of our security products for each of the various markets we serve, including the consumer, medium business, and the enterprise markets.

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

Our second quarter revenues were well diversified with the Americas leading the way contributing 47% of revenues with continued strength in the EMEA, as they contributed 40%, and the Asia-Pacific and Japan region contributed 13% of our revenues this quarter.

During the quarter we continued to experience good growth in our annuity based revenue as we saw strong demand again for SmartDefense real-time security updates from our enterprise customers and with our customers buying software subscription.

This is especially important as our customers can more easily and quickly upgrade to the latest in security technology and protection with NGX.

Especially as a key benefit of our subscription services, this gives them the ability to upgrade to new versions as they become available.

And investment protection in their security technology and vendor that is unmatched by any other security vendor as a value to both our partners and customers.

We also saw continued traction with our emerging products as we continue to bring out new releases of our emerging products with new features and added functionality, they continue to gain better acceptance with both the channel and customers.

The vision of a unified security architecture and the ability to have best-of-class perimeter, internal, Web and end-point security all managed by a single management console is an advantage we have in the marketplace and will help lead to our continued success as a provider of world-class security solutions.

In summary, the activity level remains high, the channel is engaged, and the opportunity for continued success is positive.

Thank you again for participating in the call.

And I would now like to turn it over to Gil.

Thank you, Jerry.

And welcome and good morning, and good afternoon, everyone.

The quarter of strengthening our product portfolio continued in the second quarter with the significant launch of the NGX platform.

First, delivering new features and extended functionality to over 20 Check Point products.

We've started to see the operating adoption for this new platform as customers recognize the value of the unified security platform for the perimeter, internal, and the Web security solutions.

We're also pleased -- we're also very pleased to see that the second quarter produced very strong results in our earning and revenue growth.

Our performance this quarter when operating north remains a challenging economic environment, certainly emphasizes our strong continued execution.

We saw continued strong contribution in our results tied to our newest based program, specifically healthy growth of our SmartDefense subscription.

We're very pleased with the contribution of business from emerging products at about 30% of product orders in the second quarter.

This quarter is also good growth in our [indiscernible] bringing the total to roughly 420,000 security gateway.

Finally, we also saw help increase in large orders, as Eyal explained earlier.

The third quarter will be another active one for Check Point.

As you saw we just announced the latest version of ZoneAlarm Security Suite Version 6.0 with the introduction of the new operating system Firewall, this new version offered consumers a unique and effective modular protection against spyware, viruses, and other dangerous Internet security threats.

We will continue our Check Point Experience conferences for partners and customers in Japan and Asia, and also we expect to deliver new versions of our NGX based security products for additional products.

Shifting from the technology part and the execution of our vision, to some guidance for the second half of 2005.

Generally, we expect the full-year results to be in-line or better in some areas than our original projections for the year.

To be more specific, for the third quarter revenues are expected to be in the range of 140 to $150 million and earnings per share, excluding acquisition-related charges is expected to be between $0.30 and $0.33.

Including the acquisition-related charges the EPS range will be approximately $0.01 less for the quarter.

For the rest of the second half of the year we remain comfortable with our current full-year projections for revenues; these were 585 to $600 million.

We're also increasing our EPS range for the full-year, excluding acquisition-related charges from the previous range.

The previous range was $1.18 to $1.24 and the new range will be $1.23 to $1.28 and, again, including acquisition-related charges these numbers will be approximately $0.03 to $0.04 lower for the entire year.

So in summary, Q2 was a strong quarter in business execution, in a business environment that remains challenging.

Our renewed product offering and recent customer and partner events provide momentum as we enter the second half of 2005, and we expect to continue and deliver on our vision and our end-of-the-road map.

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

Thank you.

The floor is now open for questions. [OPERATOR INSTRUCTIONS].

Your first question is from Robert bring Breza of RBC Capital Markets.

Good morning, anyone.

Gil or Eyal, can you put into context your comments about multiyear multimillion dollar deals.

Specifically could you comments on how many multimillion dollar deals did you have in the quarter, and can you kind of walk us through the dynamics of one or would of these deals so we can kind of understand the revenue recognition.

It would be also helpful if you can kind of tell us which products are involved in the multimillion dollar deals please.

I'll try to answer that even though it's not a simple answer because for these kinds of deals every deal is very different but for long time we're working on many demanding.

Different projects in different areas and particularly this quarter we won few deals like in completely different areas, completely different things.

One deal involves over our entire product portfolio and licensing deal well much more specifics to one area of the technology, both of them are providing mull -- multiple years of revenues and contribution to Check Point, and in both of them we had a nice contribution this quarter, but we'll have the majority of the deal contributing to us let's say in the range of between 3 to 6 or 7 quarters on both.

Deals are many additional deals that are in the high range of this quarter, and I think overall, the all indicated large deals were about 30% of the orders this quarter which is a very nice increase in dollar volume.

Again, it doesn't have a huge, no single deal has any huge impact specifically on on the last quarter, an impact of more than few percentages.

But overall, we hope that we see the positive trend and we see our pipeline moving forward and it also provides for additional deal again.

As he will yale said, many of these are on certain many are not but overall especially because most of these deals are not a one quarter deal but a multiyear ones, they provide us with a good reason to be optimistic, at least if the past can project the future.

Great.

Eyal, just one quick housekeeping question, from R&D prospective it decreased sequentially.

Was there any kind of major restructuring going on there or was that more option relate expense, can you help us understand why it decreased quarter-on-quarter?

The major reason is most of our R&D Israeli checkel got weaker compared to the come.

We were on accounting dollar and that's what you see in the difference.

Great, thank you very much.

You're welcome.

But we did by the way have the record quarter in terms of hiring new developers and that's another good thing and we hope to continue that.

Great, thank you.

Thank you.

Your neck question is from Michael Turits of Prudential equity.

Two questions.

Did ngx actually drive revenues either, I know it shouldn't directly but indirectly, in other words, did it drive any purchases of other products?

And secondly, any more specific you can give on the large deals to follow up.

I'm sorry, was it two large deals, two deals over a million and were there any new products in the components there, and is it the license that's actually stretched out over a couple years?

I'll try to answer that.

Ngx doesn't necessarily contribute big amount of dollar revenues for existing customer it's part of the software subscription.

All the new products will be based on ngx so many things do complement that and should be supported of that but ngx does drive and like every version, software subscription, and that's why customers do buy software subscription because we want to be in the program because they want the new versions and this is a very big portion of our business.

So even though it's not directly related to a certain version, it is, does have a very big impact on the -- on our revenues.

As for the large deals and their contribution, we have, as I said, we had more than two deals.

We have a pretty large number of large deals.

I was pointing to two the largest ones.

Both of them will have multiyear contribution.

N both product sales and and one will also have a one, a long lasting impact in terms of subscription.

Thanks very much.

Thank you.

Your next question is from Walter Pritchard of SG Cowen.

Hi, he will Eyal, if you could, I notice subscription revenues was almost flat screeningsly and we've been using that tick up quite a bit every quarter.

I was just wondering if I could give us any more detail as to why that was only flat and not up more?

Look at six months, half-year period, it's a very nice increase compared to both the part and sequential six half and it's not exactly science how it's allocated over the quarter.

I think we have very nice increase in our subscription business and as Gil mentioned before, part of the nice, the growing part here is our smart SmartDefense subscription services which are doing very, very nicely and some of that is all reflected in the growth and deferred revenue.

Okay and then just on the guidance range for Q3 I guess if I heard you right 140 to 150, a wider range than we've become accustomed to you giving.

Could you talk about why there's more uncertainties than last year or last quarter's in terms of the guidance range.

I don't know if it's much bigger much wider quarter but Q3 is more touchy because one hand and we have a healthy pipeline, and we're pretty optimistic on that.

On the other hand, especially when you pipeline customers 10 to push the purchases through Q4 and if you add the factor of the summer season and the generally weak Q3, it's a quarter that's I think has the highest risk involved.

Having said that, I think we're still in the pretty good shape and pretty good numbers to expect in Q3 but I like that to be cautious that the quarter is the most sensitive to shifting of things between months and even between quarters.

Just with on.

I think that the analyst day you talk about 54% of revenue from the year coming from license and this quarter definitely had a good number in license but still about 49% of revenue, are you still looking for 54% in each of the two quarters in the second half or is that more than likely to become more in the subscription line.

We haven't done the breakdown in the second half and it's especially to take into accounting the effect for the fourth quarter which tens to be stronger in winning larger deals so I'm not sure we can answer that.

I think what we are focused on is about the overall lines, I gave the example of the SmartDefense one.

That's a new kind of revenue stream for us.

It is an annuity based which I think as great thing because we could have sold this for one-time fee but I think it's much better for everyone, that customers that receive a service on an ongoing basis and for us as a company and for all the investors to get an and in it based which is becoming more significant so I think we're focusing on the overall composition and if you ask me I'm always preferring something with for and Tuite -- annuity based than the one-time fee because sometimes there's a short-term pressure long time it makes more sense.

So I don't know to answer the percentages for the year and building a healthy business and growing one moving forward.

Great, thanks a lot, Gil.

Thanks, Eyal.

Thank you, your next question is from Ed Maguire from Merrill Lynch.

Good morning.

A question about business in Europe.

There's been some concern that that the economy's been spotty in certain regions and I noticed that looks like revenues are flat quarter-over-quarter.

Could you comment on what you're seeing on the ground in Europe and whether the shift in currency might cause your customers to be more price-sensitive even though I know you don't get directly impacted by aptex a x.

I think we're seeing very nice business in Europe.

Large deals, many wins, I think Chicago, the first half of the year, we've seen a growth about 40% year-over-year, and it's doing fine.

We don't see any softness or weakness.

Our team there is very, very motivated and I think we're doing great in Europe.

I think what you see now in numbers, I think generally as he will yale said, I think results Europe is our best performing large region.

I think you would see a little bit financial askew in North America because a lot of new business is come from like the consumer business.

But in the enterprise business, the core enterprise that we have in the last two years, I think the strength is still in Europe.

Okay.

And just a will follow up.

Could you talk about your relationship with computer associates since their acquisition of tiny software?

We have great relationship with computer associates.

We are some our technology in our consumer products and they do OEM and entire products from us.

In terms of revenue impact on us, it's fairly small so it doesn't have much and I don't know if there's any change in relationship in the foreseeable future.

In terms of our OEM in deferred technology again I don't think it should have any effect.

And long term again, this strategy of selling to our product is not a very big part of our revenue stream or our future, but again, right now everything stays the same, and we remain in the pretty good relationship.

Thank you.

Thank you.

Your next question is from Phil Winslow of Credit Suisse First Boston.

Good morning, guys.

Good quarter.

Just have a quick question on the new product side.

You mentioned continue strong traction on SmartDefense.

I was hoping you could comment about Interspect and integrity how you saw those trending during the quarter?

Our entire emerging product category we're at least half a dozen family there, perform pretty well.

We said that our target for year end would be to have all products 30% sale.

We already reached the 30% in the second half so we're running a little bit ahead of plan.

I think each product has different quarter and different numbers and different results but overall we're seeing a healthy numbers on them as a group with then point in integrity product, we have very deep pipeline and this tends to be very large projects.

With Interspect we're making progress, we're penetrating to new geographies.

In this quarter we've seen some nice wins in U.S. territories, south of Europe, subter top stories in Asia.

We're making progress in all those, example pending the distribution, spending the wins and even winning large projects in each one of them.

Thanks, and just on the competitive environment, any, you know, changes this quarter whether it be, you know, pricing pressure, et cetera?

Not really, Phil.

You know, as it continues quarters after quarter but I think and we like to see everybody's results we continue to do very well.

I can tell you from the deals we are a part nerd in we're doing very, very well in many new market segments and many security areas.

We continue, I feel very positive and our competitive positioning, our products are gaining strength and especially with ngx and all the new versions of ngx out there.

Our new wireless devices, the new consumer product we're just very, very well-positioned and I see no pricing pressure as well and I see continue to do well on a win rate basis against those we're competing against.

Thanks, guys.

Great quarter.

Thank you.

Thank you.

Your in question is from Sarah Friar from Goldman, Sachs.

Good morning, guys.

Just a more broader question that you don't mind.

A good quarters but if I look at your year-over-year growth rates, they're starting to show a decline in terms of the pace in which you're growing.

Your analyzing those acquisitions so I understand that but if you just think 50,000 foot looking forward the next three, four quarters, how do you turn that needle around and start showing increasing year-over-year growth?

Is it new products gaining traction.

You do you think you look to acquisition or is it just the core products picking up as maybe the environment improves?

I don't know if it's a real simple answer to that but first as I said we think we're in line with our full-year plan so that's not decreasing.

We feel pretty well about that.

We see accelerating rate in the EPS because we've upped our EPS guidance, and we're very much in line right now with our revenue expectations.

Moving forward, let's remember.

We started about a year ago entering several new products for Check Point.

We've expanded from being very focused on the relatively into your product area to a very wide portfolio.

Let's remember, this portfolio even though as we said, the emerging products in total are already 30% of our product sales, it's not one year change and it's not a one-year shift.

This is a three, five-year change and if it's suck is if you will one as we know successful techology products, technology field have a lifespan of more than 10 years.

So I mean, the real results should come multiple combination of the general market conditions but also our success in those markets.

That's something that should be reevaluated over a three-to-five-year period.

As I said I'm very proud of the fact that only a year into that, we already showing results, showing meaningful results, and so on.

But that's what you to come.

Now it may come from the continuous development from products that we do internally.

I think there might be some acquisition because we're such a large portfolio we're likely to find additional opportunities on the portfolio but currently our focus is not oncoming with complete different new products for Check Point but really strengthening the existing portfolio and making each one of the products in the areas perimeter internal web anden point successful in their own right.

Thank you.

Your next question is from Todd Raker of Deutsche Bank.

Hey, guy, two questions four.

First you mentioned on the ngx license I think 4200 was the number you threw out.

Can you talk about were those licenses covered in current subscription generating for were they all incremental licenses.

How do you guys treat that number?

These are not.

These are mostly licenses that are covered by, that are existing licenses that were upgraded by the customer.

We track the user activity when we go to our user center.

And they try to up their account.

That's the best indication.

And --

Might be licenses of people purchased also at the tamen of the quarter.

I don't have the breakdown of those but I would estimate that most of these are people that have upgraded their account.

Yeah, you're right.

It includes both upgrades and new licenses.

Customers that buy new licenses.

As well as ngx and n GS with new purchases as well so that number includes both upgrades and new licenses.

And if you look at your installed base today, what percentage of your installed base would you say is currently current on subscriptions so they'll get access to ngx without having to pay you guys?

Tough questions, numbers you that we normally don't break out.

So I'm not going to start now.

But it's very high percentage in terms of renewal rate, in terms of the penetration and the coverage rate.

It's a good number, but we do have some way to go in increasing the ability to cover all our customers, not all our customers are on subscription and can upgrade for free, and we do get also some upgrades for free.

Okay and then on SmartDefense, can you guys talk about SmartDefense pane E penetration and does any of the SmartDefense show up in your license or product line?

All the SmartDefense is showing on the subscription, subscription is part of license, but you see, it's broken start of the product and licenses.

So hundred percent of SmartDefense is under the subscription line.

I don't have again the exact number of penetration of SmartDefense but I would say between 10 to 20 % of installed base.

It may be starting to approach 20% of the install base.

And Todd, you talk about revenue.

It's like any other subscription contract.

I mean the revenue recognition is over the lifetime of the contract.

By the way, which means that the fact that we see a healthy growth means it's mainly indicated moving forward the fact that more customers signed for SmartDefense this quarter than in Q1 or in quarter Q4 it means that most of the revenue growth from that will start to show up in the next quarter.

Thank you.

Your next question is from Erik Suppiger of Pacific Growth Equities.

Can you just discuss how the Nokia presses, what portion of your revenues they represent.

Nokia continues to do well.

It's maybe around 30% maybe just slightly which is where it has been for some time now.

They've come out with new models and it still is our number one platform on which we deploy on our global basis.

Some platform partners are doing.

Cross stream met another excellent quarter.

Nortel is still out there.

So we've got a good basis of platform partners that provide both partners and customers a choice on how to deploy their Check Point software.

Nokia.

What was the reason why EPS for the year are coming up but the revenues stay the same? -- In terms of your guidance for 05.

Evaluation of where we see the business condition, our expense rates and so on.

Is the share buy-back soon to be reducing share count in there?

The share buy-back is also included in that and does that does have a small contribution of say few percent, yes.

Very good.

Congrats on a good quarter.

Thank you, thank you.

Thank you.

Your next question is from Chris Russ of Wachovia Securities.

Yes, Hi, guys.

It looks like the emerging product category is still doing well, 30% of revenue.

But I don't think that it's being driven by Interspect and Connectra based on our checks.

It seems like there's relatively good interest, growing pipelines, a lot of evaluations but not much in the way of sales yet in particular for Connectra.

The SSL LPN neoterrace own by June per net screens Juniper net screens, when do you think you'll have competitive with those best of breed on the market.

Inversion 2.0 currently.

I'm trying to get a sense as to when you think you can start to drive or capture of the growth in the SSL uvn market.

I think we do have a competitive version.

It's a longer sales cycle.

We're entering that market in a certain phase and we need to work there, but I don't know, it depends on which regions of the worlds and which resellers are you talking to because we are seeing nice success in many different parts of the world.

Actually Connectra is still fairly small in terms of revenues but percentage-wise, that probably was the fastest-growing product this quarter compared to Q1 so I mean Connectra actually this quarter made some jump.

Again still small in terms of revenue but made a nice jump.

The next versions of Connectra and Interspect are going to be ngx based and that's going to be a very important change, not only the fact that they fit in overall security platform but there's going to be many new features that customers are asking that and all these versions are going to ship either this quarter or the next quarter.

Okay.

And I think at the analyst day the original guidance for license revenue growth was 16% and I know obviously you're tracking below that at 4 to 5% currently, but you're still maintaining your full-year revenue guidance.

Is it possible with the release of ngx that the revenue numbers could be conservative and maybe you'll see better traction for Interspect and Connectra in the fourth quarter which could drive some upside to revenue.

There's always room for being optimistic and I think in many, for many years we've also seen all the fruition.

I won't necessarily put my bets on Interspect and Connectra for the fourth quarter not because they're going to be successful but there's higher level potential in some of our core products and newer products that are running at a faster run rate at this point.

I do also think again that when you capture the full potential of this it may break out differently than what we originally estimate.

For example, when we see today large deal, many customers would like to include in large deal two years or three years of upgrades and subscriptions.

So total large deal is exactly what we expected.

Sometimes even 10 or 20% higher.

The percent of products may look like but in reality these are the best deals to capture in the marketplace.

Just one example to things I've seen so far, again SmartDefense is another components that we, -- that's important for growth and important for ongoing growth.

And again also with ngx what we've seen is the increased rate of software subscriptions.

Last but not least and I think that has some impact on our license or new license versus subscription is that when we induced the evs program the new software subscription program a year and a half ago many customers had to, had to synchronize their account and do a one-time upgrade that's considered a new license or a new upgrade these percentage of customer is going now because the coverage level of e EBS line is higher and the product line is rerogued so if you exclude that, the new license revenues would even show a faster growth than it currently shows.

Thank you.

Your next question is from Gregg Moskowitz of Susquehanna Financial.

First question is a ven cha, how would you he Eventia and what kind of sales cycle are you seeing or expecting for Eventia and secondly just on Japan and China, I think you made some management changes there recently.

Looking at Asia Pac overall it appears to be flattish to slightly down but if you could talk more about what you saw in Japan and China would be very helpful.

I'll start with Eventia . [Inaudible] Something that's a very, very important for our revision and for basically consolidating the security consoles and security information and the vast amount of information into something meaningful and something important.

So the reaction that I got for Eventia were extremely positive as a strategic thing.

However, we have to remind that this product in a very, very early stage in an industry that's fairly small because these products tend to be complicated, tends to be -- tend to be very will long term in terms of deployment, so the expectation that we have from Eventia in terms of contributions are fairly low at this point but strategically, by the way, we're trying to change the perception of that industry of customers of providing instead of that are very complicated, very expensive and take 6 to 12 months to deploy, we are trying to change that with Eventia and bring into products that are for affordable and can be implemented very, very quickly.

But, again, it's going to take time to do that.

Thank you.

Your next question is from Jonathan Half of UBS.

I got disconnected before and I apologize if this was asked already.

Gil now that you've reached youren of year target as a percentage of total products, can you give us a sense of where you see that at the end of the year and also he will Eyal, if you can comments on deferred historically I think they're down seasonally in Q3.

Should that be what we're expecting this quarter?

We haven't again modeled again the contribution on each product.

I think we can expect few points of increase in the emerging products of all over percentage of products, but, again, our focus is not remaining on the division between products but how we grow all of them and we'd be very happy to see the core products are growing faster and gaining more share and so on.

Jonathan, hi, you are correct.

I mean, your memory's correct historically we did see a decline or reduction in deferred revenues in Q3 and then it more than made up for that in Q4.

It could happen this quarter again.

But the quarter's just started so it's hard to predict.

Historically you are correct.

Q3 tends to have a reduction in deferred.

Thank you.

Your next question is from Shaul Eyal of CIBC World Markets.

Thank you.

Hi, guys.

Congratulations on a good quarter.

Two quick questions.

Back to the multiyear multimillion dollar contracts.

Can you tell us what verticles with those contracts financials, Medicare, what's going on out there?

I think we've seen the white wide variety.

One is clearly's technology licensing deal.

The other one is in the government sector the third one is in the retail sector.

So I mean, another one that I can mention is in the Telco section so we've seen a big variety that have and it's not characterized by one or another industries.

Unfortunately most of these large customers don't like the name to be discussed and the terms of our deals to be discussed so we are somewhat limited in the amount of information we are providing.

But as you can see, it's very, it's very different, diverse set of both the technologies, products and customers.

And with respect to ngx, Gil, how do you differentiate yourself over some of your competitor win when you meet with resell.

You talk about, for example.

What's the offering?

What's the attraction from these guys's standpoint?

I'll try to answer it in 60 seconds even though it's reasonable a half an hour answer.

I think we differentiated on all approaches.

We're the only vendor to have a true security architecture whether than point products that don't really work together or definitely are not be managed together.

Everybody recognizes support of our security management architecture, our smart center console and all the other management components that that's customer like.

Our securities is Superior to our competitor's.

We have much stronger security and we've SmartDefense we have what we call Universal updatability and upgradability of the product so again the customers in order to stay up-to-date and secure, up-to-date is not use using you a new feature.

Up-to-date is being protect against the latest security threats.

In Check Point, right now with SmartDefense it's an automatic process.

With some competitors what it means you have to switch out hardware and do a very expensive and painful deal of harder upgrades so these are just a few of the basic differentiators that our partners and customers see working with Check Point.

Thank you.

Your next question is from Steve Mahedy from Banc of America Securities.

Thanks, I was wondering large deals for a second. 24% of revenue first quarter, 30% second quarter.

Is that a trendline, that we can kind of look at moving into 3Q and of the increase how much is being driven by end market demand and customer habits versus your product portfolio or your ability to execute?

I don't know if it was one dollar trndz line but I do think we expect large deals to continue and contribute significantly to our revenue.

As I said Q3 is the most unspecific quarter in that regard because many customers, especially on large deals tends to push them more toward Q4 so Q3 is the most sensitive quarter, but, again, overall Q3 is likely to have more contribution for large deals than Q3 last year and the overall in the foreseeable future two to four quarters down the line we see the pipeline and the trendline of more large deals continues.

Also the second part --

Kind of which was really the driving factor.

Was it your product portfolio and customer habits or is it just kind of a stronger end market demand that's allowing for the larger deal size?

As I said before, I think it was very, very diverse.

One large deal was about new products.

Another is existing technology it's a new technology and number one is direct directing our core market and it's a great deal that builds a very large VPN network for a customer.

So from the three four large deals, in another large deal which I didn't speak about on the financial sector, is about pure security and our core strength and core market too.

So overall if I talked about mention four, and the sixth one is just our entire portfolio so to see for five deals, two are things that are new, two are things that are core and one as complete diverse set of products so the customer that buys our entire portfolio.

Thank you.

Your next question is from Alan Weinfeld of Kaufman Brothers.

This is the best earnings quarter since second quarter of 2001.

Do you see yourself maintaining the kind of percentage, you know, R&D to revenues in the third quarter.

Can you also give us some hints at the share buy-back to keep the kind of momentum on the bottom line?

Well, let me try to answer that.

First of all, second quarter 2001 was a while ago.

But yeah, it has been a good quarter and thank you for repeating that.

Nice to hear.

In terms of percentage of revenues on R&D, basically we don't run our business based on percentage percent of revenues, we run based on needed resources.

We're increasing our R&D resources, as I mentioned, at the beginning of the call.

The dollar expense in Q2 was a little lower as a result of the weak.

We could expect some increase in our R&D expenses because we are recruiting people, and we're recruiting the best people around.

What was the second half of the question?

Share buy-back.

Do you have any comments for the second half of the year?

Yeah.

Well, as we've said, I think earlier when we complete the program, we'll review an additional the possibility of an additional one.

And before there is a board decision on that, we're not going to communicate any future plan.

But the EPS improvement is something we've asked before as we look at our guidance for the entire year, the improvement is just not a result of buy-back, it's a result of accrued efficiency.

As you've seen our operating margin has also been improving.

We've also been in the operating margin improved and the net income is also improved 20 some percent.

I mean it's a combination of both so the majority of the contribution is the contribution to net income.

Thank you.

Your next question is from Chris DeBiase of Smith Barney.

Thanks.

I want to go back to a comment Gil made a few questions earlier [Inaudible] and figure out how much of a impacted that on the slower sequential growth we saw in subscriptions this quarter.

Do you have other --

I don't think we've seen slower growth, we've seen very healthy in software subscription is most of the software subscription we'll see in revenue, you the impact in software subscriptions is a result of the Q1 and Q4 numbers so I think we are, we are doing pretty well in software subscription and if you compare and if you try to look at what should be expected in Q3, I think Q3 last year software subscription are much lower than what should be expected in Q3 this year because I think there's been a big jump in the run rate of software subscription in the last few quarters.

So Q3 and Q4 are going to be -- should be, -- should show very growth on a year-over-year basis.

Operator, we have time for one more question.

Thank you.

Your final question is from Alaska Hernandez of Lehman Brothers.

Hi, Vick in the office of Israel Hernandez.

There are two very big deals you alluded to.

Can you give us a sense on which regions they were in and perhaps give us a range on the dollar amount, how I know I know you can't get into too much sevgs and which new products drove those deals in terms of revenue or which were the new products that were deally deeply penetrated in those deals?

I think for that we answer whatever we did.

As I told for some of the large deals we are very clear closes with the customers that are very concerned about that so we won't be able to share much of that.

In terms of geography, I believe I can say that there weren't all in the same geography.

It was a wide variety of geographies.

Primarily by the way, the two largest geographies we serve which is Europe and the U.S.

okay and on the new products, which were the most heavily penetrated in those deals?

Again, as I said, there's -- we have a lot of around that and I gave two examples of different, of the fact that five large deals we had, we had the full spectrum of products, the technologies, unique technologies, technology licensing and existing and core ones so I mean, I don't -- I can't break into specific deals but we have a full spectrum and it's very, very diverse.

Okay.

Even on small number of deals.

Okay.

Just following up on the new products, is there any change on the composition of new new product growth which you gave in the analyst day, I believe 56% of your growth in new products and core business 2005 and a follow-up when do you expect the next versions of Interspect and Connectra to be released are we looking at Q3, Q4, maybe you can give us some color on the timeline.

First on the first part as we mentioned on the call earlier that we're not giving out a new composition of our product part of the revenue what comprise of emerging or what comprise of our core, we'll keep right now.

Rashlgd the new versions, Gil, timeline for Connectra or I know tech expect, the ngx base versions.

The second half of the year and in the next basically four months.

Okay.

Okay.

Then.

Well, I like to thank everyone for your participating.

If you want to speak to management or to our investor relation department, after this call, please call our investor relation department in Redwood city, California.

Area code 650-628-2050.

Again area code 650-628-2050.

We'll be happy to take your call and call you back if necessary.

I'll talk to you next quarter and thank you again for participating.

Thank you very much.

Thank you.

Thank you.

This does conclude today's teleconference.

You may now disconnect your lines, and have a wonderful day.