Check Point Software Technologies Ltd (CHKP) 2005 Q4 法說會逐字稿

Good day.

My name is Jackie and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Check Point Software Technologies' fourth quarter 2005 financial results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period. [OPERATOR INSTRUCTIONS] Thank you.

It is now my pleasure to turn the floor over to Ann Marie McCauley.

Ma'am, you may begin your conference.

Thank you, Jackie.

Good morning and afternoon.

I am Ann Marie McCauley, Director of Investor Relations for Check Point Software.

Thank you for joining us to discuss the fourth quarter and annual 2005 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 checkpoint.com/IR.

The replay will be available through February 13th.

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 read the following disclaimer: during the course of this call the Company will make certain forward-looking statements concerning our expectations for revenue and EPS in the future, specifically as it pertains to Q1 of 2006, and in general as it pertains to 2006, 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; the impact of political changes and weaknesses in various regions of the world, including the commencement or escalation of hostilities or acts of terrorism; the inclusion of network security functionality in third party hardware or systems software; any unforeseen developmental or technological difficulties with regard to Check Point products; changes in the competitive landscape, including new competitors or the impact of competitive pricing and products; a shift in demand for products such as Check Point's; unknown factors affecting third parties with whom Check Point has formed business alliances; timely availability and customer acceptance of Check Point's new and existing products, including NGX-based products; the parties' ability to consummate the Sourcefire transaction, including to ability of the parties to [inaudible] CFIUS approval required for the transaction on the terms expected or on the anticipated schedule, if at all;

Unanticipated expenses associated with the Sourcefire acquisition; the possibility that Check Point may be unable to achieve all of the benefits of the acquisition within the expected time frames or at all and to successfully integrate Sourcefire's operations and technology into those at Check Point; operating costs, customer loss, and business disruption, including without limitation: difficulties in maintaining relationships with employees, customers, clients, or suppliers may be greater than expected following the Sourcefire acquisition; 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 & Exchange Commission.

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

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

Thank you, Ann Marie.

Good morning and afternoon, everyone.

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

The fourth quarter marks a strong finish to a good 2005.

We posted a number of record results during the fourth quarter, included the highest quarterly revenue, highest net income and earnings per share, cash and investment balance, and deferred revenue balance and growth.

The current drivers to our fourth quarter performance were strong sales of subscription end services, nice growth in our product and solutions, especially Smart Defense web security products, and VPN-1 Edge for remote side protection.

We had an impressive number of orders larger than $0.5 million, most of them combining products, subscriptions, and support.

Let me share with you the financial highlights for both the fourth quarter and 2005.

Revenues for the fourth quarter were $156 million compared to $143 million in the fourth quarter of 2004, an increase of 9%.

Fourth quarter revenues represent an increase of 11% over third quarter revenue, with product and license revenues increasing 20% sequentially.

Net income for the fourth quarter of 2005 was $89 million, an increase of 17%, compared to $76 million in Q4 last year.

Net income excluding acquisition-related charges was $91 million, an increase of 15%, compared to 79 million in the fourth quarter of 2004.

Earnings per diluted share for the fourth quarter of 2005 were $0.36, an increase of 21%, compared to $0.30 last year.

Excluding acquisition-related charges, EPS was $0.37, an increase of 20%, compared to $0.31 in the fourth quarter of 2004.

Deferred revenue this quarter were $169 million, an increase of 25 million or 17% over the third quarter of 2004.

This is a result of many annuity based deals for subscription, support, and consumer product.

All of these figures are also the highest in our history.

Operating expenses, excluding acquisition-related charges, increased sequentially by $3 million to 61 million for the quarter, similar to Q4 last year.

Total operating income, excluding acquisition-related charges, increased to $95 million from $83 million in the fourth quarter of 2004.

As a result, operating margins increased to 61% from 58% last year.

Our effective income tax rate was stable at 17%.

Cash collection continued to be good.

For the first quarter, our day sales outstanding, DSO, were 63 days compared to 54 days in the fourth quarter of last year as the quarter was back-end loaded.

We again generated strong cash flow from operating activities of $81 million.

Also, our cash and investment balances at the end of the quarter was over $1.7 billion.

During the fourth quarter we purchased 1.25 million shares for a total cost of roughly $28 million as part of our share repurchase program.

This brought the shares purchased in 2005 to 10.6 million shares for a total cost of $237 million.

Our fourth quarter revenues were well diversified, with the Americas leading the way contributing 47% of revenue.

EMEA contributed 41% and Asia Pacific and Japan region contributed 12% to our revenues this quarter.

In the fourth quarter, our large orders which are greater than $50,000 accounted for roughly 29% of total orders.

We also had good growth in our install base, bringing the total to over 460,000 security gateways.

Now let's look at 2005 annual financial highlights.

For the year ended December 31, 2005, revenues were $579 million compared to $515 million for the year ended December 31, 2004, an increase of 12%.

Net income for 2005 was $320 million, an increase of 29% compared to $248 million for the year ended 2004.

Net income, excluding acquisition-related charges were $327 million, an increase of 17% compared to $279 million for 2004.

We delivered 21% increase in our annual earning per share, which, excluding acquisition-related charges, totaled $1.3 -- or $1.30.

Including acquisition-related charges, earnings per share was $1.27, an increase of 33% over 2004.

In summary, our fourth quarter results capped a strong finish to a good 2005, with record quarterly revenues, deferred revenues, profit, and cash and investment balances.

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

Jerry, please go ahead.

Thank you, Eyal.

Hello, everyone.

It is good to be with you again today to discuss Check Point's business results this past quarter and highlight our achievements in 2005.

During the fourth quarter we again introduced new products and technologies across the various security segments we address through our expanding portfolio of securities solutions.

A few highlights include: we strengthened our internal security offering with InterSpect NGX and look forward to further benefits through our proposed agreement to acquire Sourcefire; we enhanced our enterprise end point solution, Integrity, with the addition of anti-spyware capability; and we advanced our unified threat management solution to the small business market with the new Safe@Office 500 appliance.

We have received very positive feedback from both our partners and customers as they look at the new and combined technologies and realize the resulting level of security we can provide them.

They perceive this combination to give them the level of security they need to protect their network infrastructure as something not available from any other hardware or software security company.

Now our customers are able to effectively deploy a multi-layer security architecture that is easy to manage and provides the highest level of security.

This is also a value to our partners, as it improves their solution set and capability to meet the needs of their customers.

In Q4 our emerging products again contributed 30% of new business.

Connectra had nice Q4 growth and sales for the full year 2005 increased by over 250%.

VPN-1 Edge was a notable emerging products contributor in the fourth quarter.

And we had another quarter of strong demand for SmartDefense services.

We have realized success across all geographies this quarter, with both current customers as well as new customers.

Most are realizing the power of having a single security architecture with centralized management protecting the most important elements of the network and doing so as an independent security layer that they can acquire as software and deploy in open servers or as part of an integrated hardware solution.

In 2005 we made major strides to transform our vision of the unified security architecture into a reality.

The cornerstone of this transformation came with the launch of the NGX platform.

With this major upgrade to our core technology, our security solutions are integrated and can be easily extended to adapt to new and evolving security threats.

This is unique in our market and not a capability being provided by others.

Let me share with you a few common themes that arise in my encounters with partners and customers.

The security threat environment is comprised of known threats and unknown and unpredictable threats.

In this ever-changing and evolving environment, it is mandatory that security solutions are dynamic to successfully combat threats.

The importance of having an independent security layer is recognized by our customers and partners in what they tell us, and more importantly, in their purchasing decisions.

Today you have an integrated securities solution that can be managed across a unified architecture from a central console, is resonating with our customers.

And this customer acceptance of our strategic vision is fueling the growth in our subscription revenues and deferred revenues.

A second business driver we saw emerge in our successful Q4 results is an increase in the number of customers who purchased the entire product portfolio or a broader set of our security solutions versus just buying a perimeter firewall and VPN.

We view this as a commitment to Check Point and our newest technologies.

In summary, we continued our focus this quarter in meeting the needs of our customers by providing them with the most secure solutions at the best total cost of ownership and by giving them choice on how and where to deploy the technology and to ensure that the network infrastructure they have, which may contain its own security capability, is truly secure.

Thank you for listening and now let they turn the call over to Gil.

Thank you, Jerry, and good morning, everyone.

Q4 was a strong quarter and a good finish to the year 2005.

While the IT environment remained challenging, I am very pleased with the results we reported today.

We're generating healthy business, as you can see from our record quarterly results, in revenues, deferred revenues, and profits.

As Jerry mentioned earlier, even more important are the business drivers behind our results.

These drivers include customer acceptance of our [inaudible -- highly accented language] and the broader adoption of our product portfolio, both of which gives us confidence that we're gaining traction within the market for our securities solutions as we head into 2006.

2005 was a year of most solid financial performance and extensive product and technology advancement in our security solutions.

The result is that we go to market today with the most comprehensive and integrated set of security solutions designed to help our customers address both the known and constantly changing security threat environment.

Two years ago we embarked on implementing a revision of our unified security architecture.

Phase 1 was all about expansion.

In 2004 we expanded beyond the enterprise perimeter market, adding solutions to meet internal, web, and end-point security needs, as well as offerings which extend from the very high end all the way to the consumer market.

Phase 2 focused on unification.

As I just mentioned, 2005 revolved around creating the unified security architecture with our introduction of NGX platform and the corresponding integrated product version, all of which come together for a unique centralized management solution.

Phase 3, which we call universal operatability, will focus on providing realtime solutions for the latest known and unknown security threats.

Today this capability exists in our Smart Defense service and our focus in 2006 is to extend this capability across our solutions portfolio.

You are probably also interested in our forecast for 2006, so I would like to share some of our targets, thinking, and projection for the year.

We analyze the general market conditions, our internal sales projections, and additional factors, like our upcoming Sourcefire acquisition.

Of course, you do have to remember that predicting the future always involves a high level of uncertainty.

Based on all this analysis, we arrived to an anticipated mid-point revenue growth rate of approximately 14% for 2006.

This translates to a target revenues of approximately $661 million.

The actual range can vary by plus or minus 5% of this number, depending on business conditions.

Obviously, with changes in the marketplace and expectation, it can also go lower, and with the right market climate and execution it can go even higher.

Based on historical trends in recent years, the first quarter has contributed between 21 to 24% of our annual sales target.

We believe that a good range for this year would be 22 to 23.5% of the annual target.

This translates to a range of 145 to $155 million in revenues, which we believe gives a reasonable target for the first quarter.

Our earnings per share projection for the year 2006, excluding acquisition-related charges and stock-based compensation, is expected to be in the range of $1.40 to $1.47 per share.

For the first quarter, it is expected to be in the range of $0.32 to $0.34.

With the stock-based compensation charges and acquisition-related charges from past acquisitions, EPS is expected to be $0.05 less for the quarter and approximately $0.22 lower for the full year.

We don't have yet the impact of the acquisition-related charges from the pending Sourcefire acquisition.

All the other Sourcefire numbers are factored in the range we gave and, especially with regards to the first quarter, provides a small contribution and high variance because the unknown close date of the pending acquisition.

To summarize my part, we had very good results in 2005, we set record levels in most financial measurements, and we are focused on continuing to provide good and healthy business results in 2006.

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

[OPERATOR INSTRUCTIONS] Your first question is coming from Jonathan Ruykhaver of Raymond James and Associates.

Good morning.

Just to clarify, the full-year revenue guidance; does that include the Sourcefire acquisition -- hello?

Yes.

And when do you expect that deal to close again?

It's very hard to predict.

We expect it to close anywhere from two weeks to two months.

Okay.

So, before the end of this quarter, probably.

That's hard to say.

We would like it to be before the end of this quarter, but it may be after.

Early second quarter.

Okay.

Just -- I would like to see if we could get some more color on subscription revenues.

I know the growth was quite healthy, but you have seen some decelerating growth over the last few quarters in 2005.

Is that reflective of the slowdown in Smart Defense?

I know your comments suggest that it isn't, but I'm just trying to get a feel for why the deceleration, what we should expect in 2006.

I think we saw both very healthy growth in SmartDefense.

It turns out to be one of our better innovations and very good revenue sources and that right now does appear mostly in the subscription line.

It also means that customers are subscribing more and more and they want our upgrade and they want our update.

Keep in mind that we did finish a transition that we started about two years ago from an old program to a new program, so most customers are now paid for upgrade fees and update fees and there are now more and more in fully software subscription, which helps raise the software subscription line.

Right.

Looking at the growth in the December quarter, do you think that's type of growth we should expect in 2006?

Very hard to say.

And again, I don't know that we have all the modeling assumptions here, but I think that we're looking for healthy growth in many business factors across 2006.

Okay.

Thanks.

Thank you.

Your next question is from Vik Kaura of Unterberg Towbin.

Thanks.

Good morning, everyone.

Just going back to the question on subscription, did you see any more longer term deals than usual?

No, not really.

Most of our subscription is one year.

There are a few customers that do ask for a two-year, three-year subscription, but it doesn't have any substantial or significant impact on the deferred revenue or any other financials.

Are you even considering longer term subscriptions, perhaps for the consumer side?

McAfee is announcing such an option this morning.

We do have that option, but the majority of our customers are buying the subscription and the maintenance plans for twelve months.

That's the majority.

We do have a two-year and a three-year plan, but most people go for twelve months.

Okay.

One final question.

You know, the sales and marketing line, there's considerable leverage there.

Eyal, is that leverage sustainable?

How should we think about that, going forward?

Well, in 2006, part of our plan is to invest more money in marketing and sales, but we continue our leverage model.

We'll leverage our channel.

We have over 2,000 channel partners with thousands of sales of people carrying our products, and that's the major leverage that our business model provides.

As the revenue shifts to subscription, is that a key underlying factor for continuation on this leverage?

I think it is all effectively related.

Our channel sells subscription, we also sell new products and our challenge is to grow with both.

I think more and more subscription means a little bit more stability in what we can expect and a little bit more long-term.

But still, most of our business comes from new deal sales every quarter, and we'll still have to do more of new deal sales.

Keep in mind, the channel does that as well.

All right.

Thank you very much.

Thank you.

Your next question is from Phil Winslow of Credit Suisse.

Hi, guys.

Just a couple questions.

First, Eyal, if you could give us a sense maybe, just sort of what your expectations are for the contribution of Sourcefire for '06, if that's changed at all from off the -- the call that we had back in -- a couple months ago, when you all acquired them.

Yes, we said this just earlier, depends on the acquisition date.

And of course from that date on, there is a very long future.

So the timing will determine how much this is going to contribute.

If I remember correctly, when we did the announcement we said that about 6% of our gross for the year will be contributed by the Sourcefire deal.

They will close the sales early in January, it might be a little less than that, and that is why we gave such a range because we can't really factor this exactly and precisely.

Okay.

Great.

So, probably when we close the deal we'll announce the deal, we'll be smarter in terms of how to measure it.

Great.

And then also, when you look at the current quarter, Gil, I was wondering if you could just give us a sense for just the competitive environment you all see out there and just sort of from a macro perspective, if you're seeing anything changing in just the perimeter market.

I'll try to answer that and then we'll also give Jerry a chance to get his perspective.

From the competitive environment we are in the market with -- we have a lot of competitors.

It is very competitive.

But we actually see strength in our relative to competitive positioning.

Some old competitors, we're seeing less and less.

It doesn't mean that they won't try.

It doesn't mean that they won't compete.

But we are seeing less and lesser impact of past competitors.

And we aren't seeing that many -- or many, or even at all, major new competitors emerging.

Actually we don't.

I mean, if you look around, there are not too many small or mid-sized companies that are becoming bigger factors that they were before in the marketplace, although we're very pleased with the competitive environment, even anecdotally, and you see it better than I do, the results of other companies in the security space from the last week's show, that we are doing swell or even better than others.

As well as the overall IT environment, I do think that we have a good environment when people are buying and are willing to spend, but I don't see an environment right now in any kind of rush to spend the money or anything like that.

Customers have their projects, they have their long-term plans, but there is no rush from customers to over-invest or to invest even more, and from my standpoint, the second half of 2005 -- and I think I have shared it before, so there's nothing here that is changed or new, beyond the fact that we had a very strong end of year, better than I expected.

But the second half of '05 didn't show the signs of growth that I was expecting for -- in the overall IT environment.

As I said, our year-end was pretty good and better than what I expected in Q4.

Jerry, I don't know if you want to comment more from your discussions with partners and customers on the competitive environment.

No, you and I are very consistent and it's what I hear from customers all the time, and I spend a lot of time with them, is they really value an independent security layer.

They really value the proposition that Check Point brings with unified security architecture, single management console, and we saw many large transactions and significant transactions that were competitive, where they're in the process now that they considered us, our firewall, the Firewall VPN vendor, and now they're starting to displace other installed, older technology to take advantage of our broader securities solutions set, all managed centrally.

And I can see it in the results of other companies, I can see it in activities, and I can see it in our close rate.

But I think we did very well on the competitive front across all these different security segments we're in.

So I am pleased with where we are and I think the customers really value the proposition that we are bringing to them, the choice we give them and the level of security they get through the single management console on a unified security architecture.

So I think we're very well positioned going forward.

Great.

Thanks, guys.

Thank you.

We do ask is that you limit yourself to one question to allow the maximum amount of callers to be able to ask a question.

Your next question is from Sean Jackson of Avondale Partners.

Yes, guys, you mentioned that you sold a broader set of solutions during the quarter.

Any metrics that you can share to back that up?

Well, I think Jerry said -- one metric that I think Jerry shared is that our emerging product customer is now 30% of new product sales, which is pretty good.

But then the other factors that we have are mainly anecdotal.

We analyzed large deals, we analyzed other types of deals, and we saw more and more deals with customer not just buying the emerging product but they buy a multi-product deal.

We had several multi-million dollar deals, and some of them are even multi-year contracts throughout the year and towards year-end that they revolved around the entire Check Point architecture.

Another interesting deal that we had towards the end of December, towards -- I mean, was actually beginning of December but was a year -- a deal that wasn't even forecasted that was over a million dollars of product.

The same customer, actually, at the beginning of January they issued us another million dollar order for another completely different set of products from us, which is, again, a good indication of customers buying into that vision.

These are just a few anecdotes, and the metric that shows that.

Okay.

So, is there any average deal size metric that you could share that you have that would compare it to a previous quarter?

Not that we can quote right in.

But in reality, it is pretty hard to talk about average deal size, because most of our orders are relatively small, a few thousand dollars, and involve a renewal of subscription or a single addition of product.

Some deals, like the 29% of deals over $50,000, are what we call large deals or -- deals that involve not just a single or two or three product updates or two or three product subscriptions, but involve the more complicated scenarios.

And we also had many, many deals that are over half a million dollars and we did analyze those deals and, nicely, they were -- most of them, the vast majority of them involve different product and multiple products.

Okay.

And also just on the, again, contribution from Sourcefire, want to talk about that a little bit in '06.

You did mention I think in October the numbers were something like 40 to 50 million in revenue in '06 and I know it's been -- perhaps the deal has been delayed a little bit as far as the closing of it, but do you still see a run rate of that 40 to 50 million in place as we go through '06?

Yes.

I think in the future -- the answer, the short answer is yes, but I think first in the future I am not sure if we're going to break out Sourcefire.

The contribution for '06 will be lower, both because of the translation of the run rate and the bookings into revenues which may be slightly different than previous numbers or previous numbers.

Again, I don't know which financial metrics we were quoted, but the run rate of Sourcefire is pretty healthy, and I think that we are -- so far we are very happy with the decision that we made when we announced it in October.

Okay.

All right.

Thank you.

But the contribution in '06 is going to be much less than the $40 million number, both because of the number of quarter and the timing of that, and also, again, I don't know when we even fully analyze -- will analyze it once we close the deal and we have all the detailed numbers, but how would their booking run rate or sales run rate would get translated into revenues.

Thank you.

Thank you.

Your next question is from William Becklean of Oppenheimer.

Thanks.

This is actually [Priyap] for Bill.

I was wondering if you could talk a little bit about your partnership with D-Link and also how the products out of that partnership would differ from your other UTM offering? [Inaudible]

We've announced earlier this month a new and what we hope is an important sign for new type of deals for small businesses with D-Link.

And this is for an appliance that D-Link will build that does involve our technology and many different attributes of that.

It is similar in many aspects to our Safe@Office product, but D-Link is obviously a leader and an important company in the small business market and has a lot of channel there and a lot of access to small businesses.

So we hope that such partnership with hardware vendors and with partners we've reached with that channel will have a positive impact.

It is too early to say.

We've just launched the deal, as I said, a few weeks ago.

As I said, it is very similar to our Safe@Office appliance and there is not -- I don't know specifically, technically what are the differences in speeds and so on, but it is on the same basic architecture and the same basic concept to address that segment of the market.

Thank you.

Thank you.

Your next question is from Chris Russ of Wachovia Securities.

Yes.

Good morning, good afternoon.

Regarding some of the emerging products, you mentioned, I think, Connectra was up 250%.

What about InterSpect?

How is that doing and how did that do in the quarter?

InterSpect was doing okay, not showing the same percentage growth as Connectra this year.

With InterSpect we had -- every quarter we have a few breakthroughs, in terms of which channels, which countries, which places that we sell it into.

We also have to keep in mind that because of the acquisition of Sourcefire, people are now reviewing and are actually raising their plans to do business with us but a lot of it -- a lot of the Sourcefire deals is expected to affect the InterSpect business.

Hopefully in a very positive way, because I think these two products complement each other, but that's one of the elements that we're strengthening right now with the Sourcefire deal.

Okay, Gil.

And related to that, I know the deal has not yet closed, but I'm wondering if, either at the RSA conference or at some point in the near term, Check Point is going to sort of announce its product road map and strategy for the Sourcefire integration?

In other words, will Sourcefire displace InterSpect, do you think, or Sourcefire become a technology that's embedded within the NGX platform?

Or will it be sold as a stand-alone IDP appliance?

I think almost all of the above.

I don't think that Sourcefire will displace InterSpect, but we are going to integrate the products.

We are going to create different sets of functions and features based on the different strengths of the different products, and we are going to integrate some of the Sourcefire technology in the general perimeter security products from Check Point.

We will announce the integration plan and the road map, but it will get done only after we close the deal and will be fully ready to give customers the right answers with the right work on the integration plans.

Okay.

Okay.

Great.

And finally, just the 40 to 50 million run rate for Sourcefire, you mention though that the revenue that you'll recognize will be substantially below 40 million.

Again, that's influenced by the timing of when the deal closes, but also revenue recognition issues.

How much further below 40 million?

Could it be something like 20 or 30 million?

Just trying to get a sense for how much Sourcefire is contributing to that $661 million number that you talked about in the call.

I don't know that I have the number, but again, once we close the deal we'll do that, but the range of 20 to 40 is probably the right range.

20 to 40.

Okay.

Thank you very much.

Thank you --

It's probably going to be more in the middle of that range, but it's slightly early to say at this point.

Thank you.

Your next question is from Sterling Auty of J.P. Morgan.

Thanks.

I just want to revisit the Sourcefire for the March quarter.

When you gave the guidance for the March quarter, have you included the idea that you'll close, and what kind of revenue are you expecting?

Because you did leave open the idea that maybe it close is in the June quarter.

Yes, Sterling, we-- there is little -- low revenue assumption in Q1 on the Sourcefire deal, and as we said before, it is very much depended on the timing on the closing and on the type of booking that we have way back then, so not a lot is factored into Q1 right now.

We'll see when we close it and then we'll be smarter about the numbers.

Okay.

So this is similar to when you acquired Zone, where you had just a couple of million in the quarter, is what you're saying?

Yes.

I hope so.

I hope we'll be able to close as soon as possible and get on with all of our plans.

But right now we're waiting.

Okay.

And then just one last one.

You mentioned that the quarter was back-end loaded.

I think we all know October and November, sluggish, had a big uptick here in December.

But as you started into the beginning of 2006, what's kind of the momentum or what's the discussion that you're hearing out of the channel, in terms of appetite and demand for the type of solutions that Check Point has now?

Jerry, maybe you --

It is continuing on, Sterling.

The channel is very busy, very active.

There is a lot going on.

I think there is momentum out there.

I think, as Gil said, we haven't gotten back to a free spending environment.

It is still challenging.

Everybody is being questioned on the need, the requirement, but the activity is there.

It is very pleasing.

We have got a very enthusiastic, positive channel right now that is as busy as they've ever been.

And it is across this broader security set.

I think they feel very good and I know most of you do channel checks, but they like having this broader solution set off with the single security console that's resonating very well with the customers.

So they see their activity very up and they're getting into new areas and different areas than they're really ever sold before.

Integrity is a new area, selling to the desktop and getting into the -- our SSL/VPN, we're connected, did very well this last year.

We see a lot of activity in that particular market and doing well.

So I think we're going to see a good 2006.

Okay.

Thank you.

Maybe I can add one point or one flavor to that.

We just finished our sales kickoff for our sales force worldwide.

We did one for Europe, one for the Americas, and the positive that we got from our sales people was extremely positive.

They did mention strength and potential for both Integrity and Connectra, and many, many other things that we see too, but these are two that they pointed out as promising products.

I think overall the feeling we got from our sales force and their enthusiasm was very high.

And it's not like that every year.

Sometimes the sales force is much more conservative and have a lot of questions and a lot of challenges.

Right now, and we did the hold with this year, many, many group meetings and one-on-one meetings to assess the field perspectives and the field feeling about the year, because at the end of the day that's the best vehicle that we have to understand what we need to do better and to predict the results, and their feedback was very, very positive from the soft side of their field, of the feel in the product and the product traction that they see.

Thank you.

Thank you.

Your next question is from Chris Hovis of Morgan Keegan.

Good morning and afternoon, guys.

A couple questions for you.

One, with regards to Integrity, which Jerry mentioned.

We've also picked up a high level of interest in the field around this product, but had some questions around whether the lack of standards from Cisco and Microsoft and agreement around network admission control and NAP are likely to delay adoption of integrity this year?

I think that Integrity deployment cycle and [inaudible -- heavily accented speach] tend to be very long, very, very long, even, and one of the reasons is that to implement anything that goes to all desktops in the company, it is a very long cycle and very long decisions for large companies and the main set of customers are these large accounts.

And now about the standards with Microsoft and Cisco, [inaudible] the big difference between what Check Point is doing and Cisco and others.

Many of these vendors sells about future standards, future sanctions, future things that don't exist.

We sell existing products with the sale today and work today and that's a very big difference.

So I don't think that this product have much impact on our deployment cycle, but I do know that our deployment cycle and sales cycles are pretty long.

Jerry, if you want to add to that anything.

I agree.

It is absolutely what we see in the market place.

So I guess based on what you're hearing -- or what you're saying, essentially you get some benefit from the longer time Cisco and Microsoft take to roll out their solutions?

Chris, people aren't worried about what those two companies are doing.

I don't think they even factor in from -- they're capable of deploying our technology and protecting their desktops.

You've got thousands of customers that are doing that already.

Okay.

They're not waiting for anything Microsoft and Cisco are talking about.

That's not reality, for the most part, and that's not going to inhibit anybody from deploying an end point securities solution that's fully integrated and operational within their environment.

All right.

Thanks.

And the second question, just from a vertical industry perspective, any particular verticals you see standing out, with regards to demand as we enter this year?

Not really.

I think we're still doing well across all of them.

We have been very, very broad in our approach and very successful with financial, with government, with manufacturing, retail, et cetera.

It is still very widespread.

Thanks.

Best of luck.

Thanks, Chris.

Thank you.

Your next question is from Ehud Eisenstein of Oscar Gruss.

Yes, hi.

Thank you, guys.

Two questions.

One, if you can just comment on the SSL VPN environment.

A couple of your competitors have quite challenging results.

And second, Jerry, if you can just give us some more color in the numbers of the channels that you added in 2005 versus last year?

Thank you.

I don't know that I've got an exact number of the channels that we've added.

Just a general color.

Pardon me?

Just a general idea.

We continue to grow and add to the channel, and it's usually by geographies or market segments or security segments, but I am very pleased with the strength and the growth in our channel and the coverage that we're getting as we approach new markets and new market segments.

There is some consolidation going in the channel.

We see that all the time.

We've seen it for years now.

And I think it is our strength.

But as we continue to add more products to them, the more pleased they are and the more successful they are with the ability to generate revenue and margin and serve their customers in a broader sense and add to their service revenue the value that they bring to the table.

So, that was a good strength this year.

I missed the first part of the question, though.

We got off on the --

Just on the China.

Can you elaborate on China?

Yes.

We have -- I think we discussed in the previous quarter that we're undergoing a change there, an improvement, and a beefing up of our whole management structure in the Asia Pacific region.

We created two regions out of one.

We put two Vice Presidents in place, we created a North Asia, a South Asia, and we're seeing very good traction and build-up, but it is at the early stages right now of trying to really get the right management structure, infrastructure, and partnerships in place in both North Asia and South Asia.

Okay.

Thanks --

And we'll roll that out during 2006.

Ehud, you asked about the SSL VPN and [inaudible] We mentioned before that the Connectra and the web security product line has grown 250% this year, so this is a nice growing area, still not huge, but I think we're doing probably, growing probably among the fastest in the industry, if not the fastest.

That's exactly my question.

A couple of your competitors had modest quarters.

Do you believe you're taking share there?

Well, I think we're absolutely taking share, with the amount of growth that we have compared to what we hear from others.

I do think that this market -- if two years ago people thought it was going to be user market, it turns out to be a good, healthy market, but as an overall market, it doesn't show -- it doesn't double every year.

Let's put it this way.

Yes, but we're doing very well in the marketplace with this.

And again, it is with our independent security layer and this unified security architecture, they get to add a remote access capability, the SSL into the existing infrastructure and it is proving to be very powerful.

So not only are we winning, heads up, but we're seeing a lot of replacement of existing infrastructure that people may have piloted or tried.

And I think we'll continue to see that.

Thank you very much.

Good luck.

Thank you.

You're welcome.

Thank you.

Your next question is from Alan Weinfeld of Kaufman Brothers.

Can you guys elaborate on some of the trends you're seeing in the consumer consumer market, especially as Zone Labs is in some of the OEMs and I think maybe some ISPs and -- what kind of competitive environment are you seeing there, especially pricing and -- just some comments?

We had a very good year in the consumer business, with very nice growth.

Most of our sales are online, but we're increasing our presence both in the retail stores, [inaudible] and one of those large chains recently, you can see a lot of ZoneAlarm products displayed on the shelf there and we're selling very well.

OEM relationship is going okay, but it's not a very big part of our business, and the MSD channel is something that we've started to penetrate in 2005, and I hope we'll be able to do more in 2006.

Any comment on Microsoft?

Or it-- just doesn't matter to you?

Well, Microsoft, you can never underestimate Microsoft.

They made a lot of statements.

I know that we see a lot of them right now selling in the market, but the precedent is there and the shadow is there, and I think the impact is more on other players than on us at this point.

Clearly, the impact is not on us, but just to give some insight about what we've seen so far, is that Microsoft's product is mainly targeted to the most simple task, very simple, very simplistic, very simple to use, while our products are usually serving the power users.

So it doesn't mean that Microsoft won't impact a very small part of our business that's about consumers, but it does mean that we have a lot of room to expand and to maneuver within that large market, but we are a small player.

And it does mean that the main focus of Microsoft, at least the way it looks to us right now, is not on where our core success and core strength is.

Thank you.

Thank you.

Your next question is from Jeff Englander of Americas Growth Capital.

Good morning and good afternoon.

Can you talk a little bit about Sourcefire, in the sense when you first announced the deal, it sounded like there was going to be a quick close and that's obviously extended out.

Can you talk about either the issues or maybe regulatory problems you're running into that's causing that deal to lengthen out a little?

First, let's set the record straight.

When we announced the deal we said that we expect to close by the end of Q1.

We're just at the beginning of Q1.

So, just for the collective memory.

We're going through a regular review of U.S.

Government and we've been through this before, and we're answering questions and we're waiting for them to come back to us with their final approval.

And these things take time because it's a dialogue with the government.

Are you finding anything in particular that's hanging the deal off or just a general slow down in the approval process?

We are finding specific issues that you are dealing with the government, but unfortunately we can't share those, and again, we are -- we think that there is no reason to expect many issues, but like everything working with the government, it takes time and there's risks involved.

So I don't want to underestimate those as well.

Can you talk about, in terms of the Sourcefire guidance, how the closure of the deal might impact the amount in the numbers, in the sense do you expect the Sourcefire year itself to be more back-end loaded because people are now considering your solution in addition to Sourcefire's and basically maybe waiting for the deal to close to purchase the product?

I don't think -- it is not the resolution that we can look at that and we don't see much slowdown in Sourcefire but I don't think that given the impact of Sourcefire on Check Point and the resolution, that you can see any shift that -- or any big changes that we can predict right now.

Great.

Thank you very much.

Thank you.

Thank you.

Your next question is from Katherine Egbert of Jefferies.

Hi, everyone.

I am wondering if you can make a general comment about what you're seeing in terms of spending throughout the year ahead.

I had some sense that, for you, 2005, Q4, was by far the best quarter.

Are you expecting kind of a similar pattern in '06?

Probably yes.

We clearly see the pattern to be -- every year we see that Q4 is the strongest quarter, but what we do see now is that -- first, we are working on many large projects and more of these large projects are more back-end loaded.

We did see generally, within quarters and within years, more shifting to being back-end loaded, so that's another factor that played.

And I think also we've -- the growth of the market that we are seeing is, as I think we've said, customers are not rushing to spend.

They are planning.

They do have the budget.

They do have the project, but it is not, like Jerry says, a worry-free spending environment when customers are just rushing to purchase more and more.

So I think that all translates to more and more back-end loaded quarters and years.

Okay.

And then another question, as you integrate Sourcefire, are you having to increase your direct sales staff, both for Sourcefire products themselves as well as to -- for the integrated products to sell a solution maybe higher up to the organization?

Not really.

With Sourcefire, we do get a nice sales force with them that has a lot of direct [results] with customers, even though it does work with the channel as well.

So that's a great asset that -- once we complete the transaction we'll also get into Check Point and these people can also help in selling additional technologies to the same accounts in the same regions.

We do intend to continue and invest in our sales organization and field organization.

Some of it will come to the channel part and some of it will come to the named account part.

Remember, all the named account parts that we have also worked with the channel.

So in our case, it is very -- they all have direct presence.

They all work with the channel and most of our sales people also work with customers.

So, the net of it is we are going to increase our investment in sales and we are going to add people on the ground in most locations.

Okay.

Thank you.

Thank you.

Your next question is from Michael Turits of Prudential Equity Group.

Hi, guys, how are you?

Question: you got into 14% revenue growth, put in Sourcefire, and 10% EPS growth, that's the mid-point.

So are you still expecting Sourcefire to be flat to $0.02 dilutive and what are the other factors that should work in our EPS calculations?

Tax rate, share count, and margins, if you have any feel for that?

I think we'll be happy to share more detail when we hold our Investor Day and we expect that to happen in Q2.

I think the net of everything you've seen is the numbers we arrived to, and there's many factors that impact them.

So, again, $1.40 to $1.47, it's very hard to say whether you gain or lose $0.02 from that and you gain and lose another $0.02 from something else and so on.

There is a lot of different moving parts and I think it will be pretty hard to break it up on the call like that to all the individual elements.

Yes, but Michael, just please remember that we're adding Sourcefire business into Check Point.

Sourcefire is not making -- just moving into profitability.

So we'll be adding probably similar amount of revenues, similar amount of expenses, so that the impact of Sourcefire on the earnings per share is going to be negligible.

But it will have an impact on the top line.

That's why we see higher growth in top line than in earnings per share.

Excluding just the acquisition costs, pretty much flat or neutral, in terms of the EPS impact in Sourcefire?

Pretty much.

Again, the resolution of [inaudible], it has an impact on the interest that we generate from the cash that was paid for Sourcefire.

It has an impact.

It is not -- but on the other hand, the various, in terms of how good the Sourcefire results will be and whether they turn to be flat or they turn into a great profit because the combined Company can generate much more business together, it's pretty hard to predict a swift resolution.

You've got the net of what we think --

So, anything on share count or tax rate for next year?

Oh, share count, probably similar to where we are now, maybe a little lower.

We intend to continue our buyback program.

Tax rates, more or less the same.

I don't expect any changes.

[Same off] the fourth quarter?

Yes.

Thanks a lot, guys.

You're welcome.

Thank you.

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

Thank you.

Hi.

Good afternoon, guys.

A couple of quick questions.

Eyal, the sales through the Nokia channels, what were they throughout the quarter from a percentage standpoint?

Well, I think Nokia had a decent quarter.

We don't sell any products through the Nokia channel.

Sales through the Nokia channel were zero.

Right.

I think Nokia had a decent quarter, but remember that we -- they're not selling our product.

They sell the platform.

We sell the software.

It meets in the channel.

What we've seen recently, in terms of proportion, is that there are more Check Points, secure platform. and Linux-based solution sold and proportionally, Nokia is a little lower than it used to be, despite of Check Point, Gateway, deployed or there on their platform.

But I think their business is okay and the relation with them is great and I think they are enthusiastic, they have new products, a new platform, and they are enthusiastic to work with us all across Nokia in parts of the company, in a good number of parts of the company.

And there are [inaudible] by many, many of our channel partners.

Got it.

When does your buyback reopen?

Day after tomorrow, I think.

Got it.

And just, Gil, really maybe a macro question from me, do you, kind of in retrospect ,do you foresee '05 as being some sort of an investment year, kind of with the rewards being reaped later on in '06, '07?

Is that the view?

Or -- I know that Check Point has been in the forefront of technology development.

What's the current view there?

I think every year we invest and every year we hope to see the results in future years, and so far if you think the trends look very, very clear, but '03 and '04 were investment years, and in '05 we've clearly seen substantial results of our investments in '03 and '04.

And whether the growth rate accelerates much more in '06, '07, or '08, it is a good question and very hard to answer it.

I think we are busy building the portfolio and building the customer stories and building the customer adoption and we hope at certain points the market conditions and other trends will cause the growth rate to be even higher.

But it's not easy predict those exact inflection points in the marketplace, upwards or downwards.

All right.

Thank you very much.

Good luck.

All right.

Well, thank you very much, everyone, for your participation in our conference call.

We hope to see all of you at our Investor Day, which we expect to hold in the second quarter.

If you want to speak to management or to Investor Relations following this call, please call our Investor Relations department at phone number 650-628-2050.

We'll be happy to take your call and return them.

Thank you very much.

We'll talk to you soon.

Thank you.

Thank you.

This does conclude today's teleconference.

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