Check Point Software Technologies Ltd (CHKP) 2006 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Check Point Software Technologies fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

It is now my pleasure to turn the floor over to your host, Anne Marie McCauley, Director of Investor Relations.

Ma'am, you may begin your conference.

Thank you.

Good morning and afternoon.

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

Thank you for joining us to discuss the fourth quarter and annual 2006 results.

As a reminder this call is being webcast live from our website and is being recorded.

To access a live webcast and replay information please visit the Company's website at www.checkpoint.com/IR.

The replay will be available through February 7.

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.

Forward-looking statements include statements regarding Check Point's expectations and beliefs such as our expectations regarding the impact and future development of new initiatives, our expectation that our important new products and solutions will reach the market in the first quarter of 2007, our belief that the increase in headcount during 2006 will help us execute on our 2007 plan, our expectations that we will implement the integration of ProtectData during the first half 2007, and our belief that our emerging technologies solutions will be needed by Check Point customers in the future.

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

Because these statements pertain to future events they are subject to various risks and uncertainties and actual results could differ materially from Check Point's current expectations and beliefs.

Factors that could cause or contribute to such differences include, but are not limited to the risks discussed in Check Point's annual report on Form 20-F for the year ended December 31, 2005, which is on file with the Securities and 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 very much, Anne Marie.

Good morning and afternoon, everyone.

I would like to share with you our strong fourth quarter result, a recap of the year 2006, and also provide details on these financials.

In the fourth quarter of 2006, Check Point experienced strong performance in all aspects of our business.

This performance relies on many new initiatives which we brought to market during 2006.

These initiatives include launching new products, VPN-1 UTM, and Power Solutions, introducing collaborative enterprise support programs, the CES in Europe and Asia, and driving larger transactions within organization through our strategic account program.

These initiatives made important contribution to our results, and we expect this trend to continue into 2007.

And as you will hear later, during 2006 we created important new products and solutions which will reach the market in the first quarter of 2007.

These new products include in-house development as well as the results of our acquisition of Point Tech and NFR.

In the fourth quarter we posted record results in revenues, record growth in sequential deferred revenues and a record number of large deals.

We experienced healthy demand for our new perimeter security product lines especially the UTM offering, strong business in subscription and support with the success of the CES program and over 50% growth in SmartDefense, our security update service which we sell as an annual subscription.

Before I dig into the numbers, I would like to remind you that our quarterly and annual results for 2006 include the impact of SFAS 123R, the inclusion of equity compensation expenses and the P&L in our GAAP financial results.

In our press release, which has been posted on our website www.checkpoint.com, we are presenting GAAP and non-GAAP results and reconciliation tables which highlights this data.

Now let me share with you the financial highlights for both the fourth quarter and 2006.

Earnings for the fourth quarter were $160 million compared to 156 million in the fourth quarter of 2005.

An increase of 3%.

GAAP net income for the fourth quarter of 2006 was $80 million compared to 89 million in the fourth quarter of 2005.

Equity-based compensation expenses, which accounted for $9 million in this quarter are the primary difference.

We also incur acquisition related in-process R&D of $1 million for the NFR security acquisition this quarter.

Non-GAAP net income excluding acquisition related and equity based compensation charges was $91 million, the same as in the fourth quarter of 2005.

Total operating expenses for Q4 were $80 million, excluding equity based compensation acquisition-related charges of $11 million, operating expenses were 69 million.

This compares to 61 million in Q4 last year, and 64 million in Q3 this year.

The increase in expenses is a result of important headcount growth, mostly in R&D, sales, and technical services.

Our total headcount at the end of Q4 was approximately 1,570 employees, and grew by more than 150 employees this year.

This increase will help us execute on our 2007 plan.

Our effective income tax rate was stable at approximately 17%.

GAAP earnings per diluted share for the fourth quarter of 2006 were $0.35 compared to $0.36 last year.

Equity based compensation expenses had a $0.04 impact on GAAP EPS.

And finally, non-GAAP EPS for the fourth quarter of 2006, excluding acquisition related and equity based compensation charges, was $0.40 compared to $0.37 last year, an increase of 8%.

Deferred revenues this quarter were $204 million, an increase of 31 million, or 18% over Q3 2006, this is also the highest figure in our history.

This is also the highest sequential growth we ever experienced.

Strong software subscription, CES, SmartDefense, and consumer business drove this number up.

For the fourth quarter our days sales outstanding, DSO, were 67 days, compared to 63 days in Q4 last year, as our business continued to be back end loaded.

Cash collection continued to be food, in the fourth quarter we generated cash flow from operations of $78 million.

Our cash and investment balances at the end of the quarter was $1.65 billion.

During the fourth quarter we purchased approximately 1.4 million shares, for a total cost of roughly $32 million, as support of our expanded share repurchase program.

Our fourth quarter revenues, again, were well diversified with Americas contributing 46% of revenues, EMEA contributing 42%, and Asia Pacific and Japan region contributed 11% of our revenue this quarter.

For the fourth quarter our emerging products contributed approximately 30% of total product revenue.

Now let's look at 2006 annual financial highlights.

For the year ended December 31, 2006, revenues were $575 million compared to 579 million for the year ended December 31, 2005.

GAAP net income for 2006 was $278 million compared with 320 million for 2005.

Equity based compensation expenses which accounted for 36 million in this year are the primary difference.

Non-GAAP net income, excluding acquisition related and equity based compensation expenses was 320 million compared to 327 million for 2005.

GAAP earnings per diluted share for 2006 were $1.17 compared to $1.27 last year.

Equity based compensation had a $0.15 impact on GAAP EPS.

Finally, non-GAAP EPS for 2006 excluding acquisition related and equity based compensation charges was $1.35 compared to $1.30 last year, an increase of 4%.

During 2006 we purchased 23.3 million shares for an average price of $18.80 per share, and for a total cost of approximately $435 million.

After year end we completed a tender offer for ProtectData, the 100% owner of Point Tech.

As of January 23, 2007 we managed to acquire approximately 96% of the shares.

We are working hard on the integration plan, which will be implemented during the first half of 2007.

In summary, we're pleased with the financial results we posted this quarter, but we believe that our performance and execution has improved, and we head into 2007 with a robust portfolio of existing new products, and I will now let Jerry and Gil speak more about business and about our plans.

Jerry, please go ahead.

Thank you.

Hello, everyone.

Thank you for being on the call with us today.

Following Eyal's comments regarding our financial highlights I would like to focus my comments on some business highlights for the quarter and the year that we think are important aspects of our growth strategy and will play an important role in 2007 and beyond.

As you have seen, the quarter was very good from a financial results perspective.

There are many reasons why, but what is pleasing to me is the contribution we received from a number of the new initiatives we announced recently as well as some significant new announcements we made during the quarter that we expect to have a positive contribution going forward.

Earlier this year we rolled out our collaborative enterprise support program what we call CES, in Europe and Asia, and it has been well received, as evidenced by the strength in our subscription and service revenue growth this quarter and this year.

As we have previously described, this support program is a combination of subscription and support delivered jointly by Check Point and our partners.

It is designed to add more value to customers and partners by improving the support our customers receive.

We will continue to focus on expanding this program and modifying it as necessary for adoption in the U.S.

We continue to see positive contribution from our new strategic account program that we talked about last quarter.

Through this program, we provide our customers the ability to make a long-term buying decision to acquire a broad range of our security products and deploy them over multiple years.

While we have seen a favorable trend both in the size and volume of large deals in both the quarter and the year tied to this program, a significant part of the revenues derived from these transactions will be recognized over the next few years.

This trend of large deals is a result of successful initiatives with large accounts whereby Check Point becomes the major provider of network security solutions.

As we continue our efforts to broaden our product portfolio under our unified security architecture it should become even more beneficial for our customers.

While this program has been implemented on a pilot basis I am pleased to note that we are seeing a broad appeal of this program.

Going forward we plan to implement this initiative in all regions of the world and across many different sectors.

During the quarter we saw an increase in large deals, which is transactions greater than $50,000.

As they accounted for more than 35% of total orders.

In Q4, we also had 11 transactions between 500,000 and $1 million and four transactions which were greater than $1 million.

In addition, we continued to grow our installed base adding 28,000 gateways, bringing the total to over 556,000 security gateways installed today.

The growth in our business this quarter comes from a healthy mix of product, subscription services, and different regions of the world.

A few areas for specific mention include new license growth for our new VPN-1 UTM solution, the continued positive contribution and growth from our SmartDefense services, which is part of our subscription revenue, and the very nice increase in revenue this quarter from our CES program.

Geographically we saw very strong business contributions from our EMEA organization, Europe, Middle East, and Africa, good results in the Americas and Asia Pacific, and softness only in Japan, for which this is a seasonally slow quarter.

As you have heard us explain many times now, a key component of our growth strategy is our unified security architecture.

This is resonating not only with customers and partners but is also a concept being embraced by many industry analyst firms.

As we continue to expand the product portfolio as we have done this year our story is becoming even more compelling.

Our ability to reduce the number of vendors and niche products and account needs to install and have them all managed by a single management council is of great value.

Especially as we add very important and emerging technologies that address new security layers.

Of equal importance is that they are solutions that will be needed over the years by every Check Point customer.

Let me also share with you that just this past week we held our first ever Global Partner Advisory Council in Israel and it was very beneficial.

We reviewed our plans for the first part of 2007 and received very good input and suggestions from some of our major partners from every region in the world.

But equally important is that we also had a chance to hear firsthand the excitement our partners have for our strategic initiatives.

Now this week we are holding our sales kickoff meeting for our colleagues in EMEA and Asia in Tel Aviv and next week we will be doing the same for our field organization in America so they are aware of and in line with our plans for this year.

In summary we will continue to focus on our execution of our new initiatives we announced this past year, as well as launching some additional ones that we believe over time will result in the top-line growth consistent with our strategy.

Thank you again for being on the call with us today.

And now I would like to turn the call over to Gil Shwed.

Thank you, Jerry, and hello, everyone. 2006 started with some challenges and I'm glad to report that we finished the year in great shape.

The fourth quarter showed our business success.

Actually, our business volume this quarter was at a record high, reflecting the success of our recent product announcement, many changes we made in the Company and the programs we introduced during the year.

More importantly, 2006 was a strong year of building for Check Point.

We formed an expanded strategy that led to us make two important acquisitions within the past month.

With our new strategy we intend to accelerate activity in our core market and form the foundation for expansion into an additional layer of security, the data security layer.

In our core network and infrastructure security layer we introduced the UTM software family during the year, acquired NFR Security to add signature-based intrusion detection and prevention technology and continued to build Check Point's unified security architecture.

We have made significant investment in getting into the data security market with the acquisition of Point Tech, and we are now the leading vendor in this field.

But this is only the first step in our road map for data security.

Combining the steps we have taken in both the network security and the data security layers with the strength of our management platform, we're uniquely positioned to deliver the IT world's future security architecture.

We will share more information with you at our upcoming analyst day that will be held on February 15, in New York.

Investment team will be able to provide a more detailed description of our strategy and architecture.

The first quarter is going to be a very busy one for us as we intend to launch new products as well as introduce the recently acquired product into our channel and our field organization.

The effect of all these changes provide us with some positive financial outlook, yet raises the level of uncertainty in the near future given the level and complexity of activities we have planned and the rate of which we achieve acceptance by the marketplace.

Given that, I'd like to share some initial forecasts for the quarter and for the year.

As you know, we're working now on the purchase price and location of the ProtectData acquisition, the result of the study will have significant impact on our GAAP results for 2007.

Since the study has not been completed yet we cannot provide GAAP EPS forecast at this time.

For the first quarter of 2007, we expect revenue to be in the range of 158 to $169 million, and non-GAAP EPS, excluding the effect of stock-based compensation and acquisition related charges, is expected to be in the range of $0.32 to $0.37.

For the year 2007 revenues are expected to be in the range of 690 to $720 million.

Non-GAAP EPS for 2007, excluding the effect of stock based compensation and acquisition related charges is expected to be in the range of $1.40 to $1.54.

In summary, we finished 2006 in great shape and set the foundation for building a successful 2007.

With that I would like to thank you again for joining us and open the call for your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Gregg Moskowitz of Susquehanna Financial Group.

Just as a quick housekeeping now that Q4 is closed out, and I realize the acquisition is not completely finalized technically but was wondering if you could provide us either with full-year revenue and operating numbers for Point Tech or even a Q4 run rate for ProtectData.

Hi, Gregg.

As you all know, ProtectData is a public company that's traded on the Sweden Stock Exchange.

They will provide their 2000 -- Q4 and 2006 number on February 8, and until then -- February, shortly after the shares will be delisted from stock exchange as we assume 100% control of the Company, but at this point, they are public, and you'll to have wait until they release their numbers.

In terms of guidance for ProtectData, at this point no change in terms of how you're thinking about 2007 versus what you had said previously?

Yes, these numbers are included in the forecast we gave for Q1 and for the year.

Okay.

Then, Jerry, you talked about the CES program.

It sounds like it's continuing to gain steam.

Has it proceeded in Asia, would you say as successfully as the start you got off to in Europe and can you also just kind of address your plans to potentially implement this in the U.S. as well?

It's continue -- doing well in both regions.

Europe obviously was first, so we're seeing stronger business results there but it's been very positively received in Asia and we expect to see that continue to grow.

In the U.S. we don't know yet.

We are going to do whatever is right for each one of the geographies and markets relative to the partners and the support and the service that the customers want.

In 2007 we'll do something because we still want to focus on improving the overall experience of our customers and the business benefits to both us and our partners.

I really don't know if it's going to be an identical program or a modified one or how we're going to do it, but that is on our list of activities for 2007.

Thanks very much.

Want to just highlight one of the differences between Europe and the U.S. for this program.

In Europe we had most of our support or 100% of our support given by our partners, so introducing CES was pure upside for us and pure upside for the channel and customers that got better support by having Check Point much more involved in that process.

In the U.S. significant part of our customers received direct support from Check Point so one of the challenges is how to work this mix model when some people receive direct support, other people receive two-tier support.

Without cannibalizing our own direct support sales in the U.S., and while providing the partners with the right incentives to provide good support working with us.

So that's the big challenge in doing it in the U.S., and we think that we can address that but it requires a lot of hand-to-hand work with the channel to make sure it's a good program for both sides.

Great.

That's helpful.

Thanks.

Thank you.

Our next question is coming from Robert Breza of RBC Capital Markets.

Jerry, I was wondering if you could kind of give us an example as you're working with the strategic account program and seeing these larger deals, wonder if you could just kind of walk us through an example and what that -- what you're seeing from a value increase within the customers?

Well, it's interesting.

They all take a little different shape and form but generally what we've done in most the cases, in the pilot program, and as we're rolling it out, we see some commonalities that customers are really looking for a partner for the core part of their security technology and architecture that they can lay out.

We have talked to -- I think now for well over a year about a unified security architecture.

The larger th account, the more that resonates.

If they can look to a vendor that's got this management council that can imagine the wide range of security technologies, very innovative, industry leading, and there's no compromising on what they put in, but they can focus on that architecture and say here's what we're going to do over the next two, three, four years from a security standpoint, roll out deployment, replacement of what we have, it takes a variety of things, and they commit to us as a vendor that they are going to take our technology and it's going to be the core of their security infrastructure.

So we lay out the various products and the deployments and where it's going to go and we give them an agreement that's commensurate with their volume of purchases over a two, three, four-year period, and when they're going to deploy it and they have found it very, very attractive.

We see this gaining a lot of momentum in the marketplace.

As we continue to broaden our portfolio of products it becomes even more important to them, and beneficial to them, both the customer and the partner of the ability we give them to have a long-range plan under our unified security architecture.

We saw a lot of excitement, we did with the partners, I have with customers we talk to about Point Tech, about what we're doing in the IPS arena, et cetera.

So I think this is going to continue and we're very pleased with the initiatives so far and the success we've had.

Just one follow-up for Gil and Eyal.

As you look at the new products, Gil, can you kind of give us a little bit of color where those might be fitting, and then, Eyal, when would you expect those to impact the revenue stream?

We are going to introduce many new products.

Some are going to be the ones we just acquired.

They will fit on the data security side, the one from Point Tech, the one from NFR in the core network and enterprise security with better ideas like [Inaudible] solution.

The other products are going to fit right in the middle of our product strategy and we are going to address a lot of the mid-market needs.

I'm not going to spend too much time on that because they released -- because we haven't released the product yet and the information, but I hope it's in the coming weeks, and February 15, we will be able to share much more about that and give the full details about this product.

Our next question is coming from Sarah Friar of Goldman Sachs.

I wonder if, first of all, Eyal, could you let us know, was there an impact from NFR in this current quarter, and how should we think about expectations for NFR for the 2007 year?

Well, in the current quarter, the impact of NFR, both on the top line and the expense line, is way below $100,000.

So I can say negligible.

Going forward, we believe that this is going to be an important product line for us, definitely technology that we wanted to add, it could have a positive impact in basically two places.

One, I'll say in selling those products, the other position, Check Point as a vendor for network security solution was one of the broadest set of solutions in the marketplace.

So here's the impact, but we're not going to break it out separate.

And then I wonder if more broadly you could talk a little bit about your thoughts on Check Point and having more hardware underneath your solution.

Obviously you do today, and you do with partners, but are there any thoughts, as you start to progress further into that UTM market that you start to just do the whole appliance yourself?

We have talked a long time that our strategy and the strength in what we do with the software and we intend to make that it way.

The places that we do get involved in the hardware space, of course we are involved with our partners.

The open platform, the appliance partners all the time, but in places we don't see we can achieve the best results for the customers we tend to also come up with our own integrated hardware and software.

That happened before in the low end of the spectrum with VPN-1 EDGE. [Inaudible] It's not unforeseeable that it will happen more in the future, and it will be in the places when we feel that doing it ourselves we can achieve things that we don't achieve for the customer benefit with our appliance partners today.

I think we see an important growth for all the hardware partnership and appliance partnership we have in the marketplace.

Very helpful, final one for you Eyal, just on share repurchase.

You did actually a fair amount of it in '06.

Now that Protect Data is getting close to closure will you come back into the market and should we assume a similar sort of share repurchase rate for 2007?

We do not give details and provide any forecast on our share repurchase plan.

The plan has been approved by the Board and it is open.

We will use it as we see fit.

Of course, it depends on all the parameters surrounding buyback program but it's not out of the question that we'll continue to buy.

Great.

Okay, thank you.

That is in effect today.

Thank you.

Our next question is coming from Dino Diana of UBS.

Can you talk about the date you expected to be able to first be able to recognize revenues from Point Tech and is this later or earlier than you had originally expected when you gave the 95 to 105 million guidance?

We don't see a major big impact.

Basically the day that we can start consolidating the Company is when we reach 87%, that's January 17.

So the first 2.5 weeks of the year should not have a meaningful impact.

I don't see a reason to change this number.

When we gave the 95 to 105, we said these are for full year, but as we said, I don't think that the difference in the two weeks caused us to change that range in any significant way.

What is the expected revenue contribution from Point Tech in 1Q '07 and the full year?

I guess 95 -- you just answered that 95 to 105 for the full year.

What is it for 1Q '07?

As we said, we gave the annual number but at this point we will not provide the quarterly breakdown.

Okay.

With bookings up, looking at your core business, bookings up 6% for the quarter and 1% for the year, it seems like you stabilized your core business.

Can you talk about maybe how we should look at license going forward in the core business and maybe should we see more going on at the subscription line as you get more success at CES, SmartDefense, and some of the larger deals, or could you stabilize license revenue organically as well?

Firstly, our objective is to grow the license line at all times.

We don't always achieve that, but I think it's the general objective that we have is clearly grow that line and we do have it planned for 2007.

The subscription line, we also intend to grow it and we actually are pretty pleased about the changes we made in our business into driving more and more business into a new EPN, that's true for software subscription, that's true for the CES program, that's true for SmartDefense and we are going to come up with more and more programs like that, that create more and more annuity.

We think it's important, especially given the large installed base that we have in the marketplace and the fact that we think that customers do need to get security updates at all times.

You cannot just one thing in the 2006 numbers but during the shift from software subscription to the support line and I think Eyal alluded to that a little bit by explaining that that's because the CES program combines the two elements together and the accounting treatment changes that a little bit.

So I think you should look at these two numbers in the support and subscription and see the combined growth of them, and we intend to keep growing both of them.

Would you say that you -- in terms of those subscription programs, are you fairly early on in the -- obviously CES is pretty early on.

Would you say -- you went from 8% to 10%, I'm wondering that delta, is that something that you just -- you feel like you just starting to gain traction or do you feel like it's kind of underway, or well underway?

I think it the's underway.

I don't have in front of me any analogies about what should be the total impact and so on.

All the numbers that we have are already embedded into our forecast but I think we can grow that, and that's the intention.

Right now we cover a little bit more than half of the world with that.

We still have the U.S. that's not fully covered but let's not forget some of the U.S. is covered with direct support, will generate even more revenue to us.

As I said, we have some more initiatives to drive more value in our support and subscription offerings to customers around the world.

Thank you.

Thank you.

Our next question is coming from Sterling Auty of JP Morgan.

Thanks, guys, two questions.

I wasn't quite clear, could you give us some color on what the contribution from CES was in the quarter?

You mentioned it was good, but I didn't hear anything quantitatively in terms of either sequential growth or absolute dollars or contribution.

We wouldn't provide the breakout.

You can see that in the growth of our support revenue line and most of the CES is in there, but as Gil said, accounting wise the split is a little complex, and CES is a hybrid between EBS and support, and sometimes it's split to th separate line could be artificial, but it's definitely a driver and the best way to see that the numbers as we report them are in the support line.

Okay.

And then on ProtectData, at what point can you fully introduce the product to the entire Check Point channel in terms of both training as well as having the SKUs available?

We plan to start doing that in Q1.

How quickly will the channel ramp up and everybody will be trained?

It's too early to say.

But the initial enthusiasm is very high.

As Jerry mentioned we had here last week, the partners from around the world and both the distributors that were here represent a big portion of the market and the resellers represent -- the top resellers are all enthusiastic about that, and we believe it will start as early as February to start introducing it to the channel.

Got you.

Thank you.

Thank you.

Our next question is coming from Ed Maguire of Merrill Lynch.

Please go ahead.

Yes.

Good morning.

Could you comment on the trends you may be seeing in the consumer business?

Yes.

Q4 was a good quarter for the consumer business.

As you know, we're not the biggest player in this market.

We are the small competitor giving headaches to all the big players, so I can't sit here and tell you that we have the best view of the consumer market.

For us it's an opportunity, and one which we have been working very nicely on.

The growth in SmartDefense has been pretty strong.

Do you have any estimate in terms of what proportion of your installed base is a subscriber to SmartDefense?

We did analyze it.

It's still under 20% of our installed base, so we do have a way to go in the introduction and the adoption into the Check Point installed.

Finally, could you just comment on what you may be seeing competitively in the core market against Juniper and Cisco in terms of kind of competitiveness and pricing tactics?

Jerry?

Yes, I think we're doing very well.

We see it especially in the large transactions, the large accounts, the big strategic deals we're doing.

Portions of all those transactions have been competitive displacements, and generally when you saw that our whole quarter was very good, very solid, we'll have to see what everybody else did, but I feel, anecdotally, we're doing very well in the marketplace and have.

Again, it goes back to the unified security architecture, it goes back to the broadening portfolio, it goes back to these long-term commitments from people looking at a security vendor to provide them a security layer.

I know that's debated somewhat, but that resonates very well with large customers that buy security independent from their network infrastructure.

We see that continuing.

So I feel very good about our competitive positioning.

As we continue to expand our portfolio products and everything under the unified security architecture we are going to strengthen that position in the marketplace, across all market segments, not only enterprise but also in mid-size and small businesses.

Thank you.

Thank you.

Our next question is coming from Phil Winslow of Credit Suisse.

Please go ahead.

Hi, guys.

Just wanted to sort of look at your plans for introduction of Point Tech into the U.S., obviously it's very sort of EMEA focused revenue contribution right now.

How do you sort of see that trending over time and sort of what are your plans for Point Tech really looking at the indirect channel here in the U.S.?

We intend to introduce Point Tech to the channel all over the world.

I think there's a great enthusiasm in the channel to have it.

Point Tech has already started working with the channel but we feel that the product itself is a very good product and very mature product in its ability to grow into the channel.

It's relatively simple to install and work with.

Point Tech also have very good named account or direct sales force in which we intend to incorporate into our sales force.

And let's remember we do have named accounts.

We do work the named account for the channel and we'll -- over time we'll have to see how to unify that structure and make sure that we work in the clean and simple way with the channel all over the world.

Then Eyal, you guys continue to see pretty solid strength in technical services.

Just wondering what your expectation for that is going forward here as far as growth.

In our technical services?

As we said before, the impact of the CES adoption and introduction into U.S. could definitely have a more accelerating impact on technical services.

On revenues we have been doing some more professional than in the past.

We rebuilt our professional services group during 2006 and we are beginning to see more revenues coming from that area so definitely that's -- and you can see the numbers.

The numbers for Q4 and for 2006, in general, compared to 2005 are telling the story here.

Definitely there will be more growth in that part of our business.

Great.

Thanks, guys.

Thank you.

Our next question is coming from Katherine Egbert of Jefferies.

Just a quick question on the UTM products.

That's a pretty crowded market and you guys seem to have distinguished yourselves a bit there.

Can you talk about why?

I think first in the UTM space there is many different changes that happen.

Initially the UTM market that started with a few low-end vendors that provided th appliances for the more the small business market, markets that we weren't that big of a player in.

I think more and more we're seeing that also mid-size companies and mid-range installation and large companies are also interested in that.

I think here we do have some unique differentiation in the fact that we have the scalability of management, we have the scalability of products.

We also have to remember that this is a very early market, and despite some market data showing big numbers from this market I believe that this market is still fairly small.

For example, things that we have checked, for two reasons, one, some people call UTM products, products that are not fully UTM.

In other cases people that are buying UTM products don't actually activate them and use them in UTM.

For example, some of our surprise is by using very well-known vendors that we acquired their product, we have set up to use all the UTM capabilities, and turned them on, and the product simply wouldn't work.

I'm not talking about won't work in the performance that it's supposed to.

Some of these things we are trying -- not some of it.

We are addressing all these things with our UTM offering.

So first, we believe that our products do work, and we do have a much -- well integrated solution.

It's not a bunch of different solutions piled up on a single piece of hardware.

It's a fully integrated product with single management, with things that do work together, and as I said, we have just made our first step in this market and I think that the full effect of some of our UTM solutions, or not the full effect, but the next steps in our UTM strategy will be seen in 2007 and we'll see that these solutions take more share and gain more credibility and share in the marketplace.

That's a nice segue to my next question which is, now that you've sort of begun to get a little more aggressive on the M&A side, can you talk about other areas where you might want to add pieces of technology inorganically?

We keep looking for an acquisition in both the core network security space and in the data security space.

Even though I don't think we should expect too much happening in the near future, because right now we have in our hands two important acquisitions that we need to integrate, that's our focus.

I also think that we made a pretty big step with Point Tech, that's a very large vendor in that space.

I think in order of magnitude almost larger than most players in the different niches of the data security space.

And I also think that today with the amount of developers that we have and the amount of know-how that we have inside Check Point we should expect to see even more coming up from the Check Point development, both the core development teams that are here and also the new development teams that we are just adding with the acquisition.

So we now have a very broad spectrum to look at.

We are looking and meeting and learning all the subfields and what's available there, but in the near future I'll expect most of what we do to come from within Check Point.

Thanks, Gil.

Thank you.

Our next question is coming from John Walsh of Citigroup.

Please go ahead.

Could you just talk about vertical -- the vertical markets and any particular areas where you saw strength relative to plan or weakness, and then comment specifically on the government market.

I don't know that specifically we saw any strength or weaknesses in different verticals.

I have a lot of anecdotal examples of places that we won and that we have seen some companies and some wins from the same industry, but I don't think that I can say something about specific ones.

I mean I have few examples on the financial services, wins that we had, where were specific solutions for financial services or overall strategic wins in the financial sector.

I even have some examples of telecos and service providers, very few recent examples, automotive companies, there have been few important project that we recently did, and government, I think we're doing well against our plans as well.

So I'm not -- I don't know that I can point out any particular strength or weaknesses in specific verticals.

Fair enough.

On the strategic account side, could you talk about the revenue recognition there and how that has contributed, for example, the 4 million plus deals in the quarter--?

Without going into too details on accounting, but basically these are long-term transaction and long-term engagements, from which we recognize very little at the beginning, and revenue recognition occurs as the transaction materializes, and specific orders come in.

At the end, the entire agreed-upon business volume would come in within -- if it's a three-year deal, within year one, year two, and year three.

But revenue recognition here is a little more back end loaded, which means what we're doing here would create a backlog, for business something that in our business model we never had before.

And I think this is very good.

It gives us a little more visibility, but still not the biggest part of our business.

But we're working, we're developing this, and it will definitely improve our visibility, give us much larger opportunities to book and also the ability to increase the components of product and licenses.

Could you give us a sense of how many of these strategic accounts you have signed?

Is it -- even a broad range of under 10 or 15 or more than 20?

Last year I think it was on the order of magnitude of 10, but let's remember last year we introduced it only to two or three small countries.

We haven't even started exploring it in the bigger countries that we serve.

So actually we were very, very pleased with the fact that after formalizing the program in the second half of the year, within three, four months we already had some customers signed up.

Because let's remember, these are long term deals and the sales cycle for them should be long.

Just one final one on that.

Is it still fulfilled through the channel even though there's some kind of direct engagement by Check Point?

Yes.

Thank you.

Check Point is not different than any of our other type of business.

Thanks.

Thank you.

Our next question is coming from Jonathan Ruykhaver of Raymond James and Associates.

In the fourth quarter Nokia began licensing the Source Fire 3D system for its suite of network security appliances.

I'm just wondering, does this have any kind of impact on Check Point, specifically the license opportunity and Nokia appliances for your VPN power application also the NFR product as well?

No.

It doesn't?

It doesn't.

Again, Nokia has been putting multiple vendor applications on their appliances for the last ten years.

We think it's very smart because they should provide a security platform for more than just Check Point.

Up to now Check Point was the vast majority of the software sales of their appliances but we believe the more they sell of their appliances, actually the better it is, because they will be able to invest more in developing better hardware architecture and building a stronger business for Nokia, and I think that helps all of us.

How much of your sales come from the Nokia platform today?

Sales don't come from the Nokia platform.

We are selling in conjunction with the Nokia platform.

Our products are deployed on Nokia platform, it's around 20%.

Excuse me, 20%.

Yes, but channel sales, not Nokia.

I understand that.

Then, I guess, just one final question.

Looking at your two product lines, the VPN UTM and the VPN Power, where do you see the bigger opportunity based on what you believe are the strengths you bring to the market for each one of those product lines?

Which of your children you love most?

So you see an equal opportunity for both those product to do well going throughout 2007?

I believe it's different opportunities, and these opportunities tend to grow in different phases and different paces.

Right now we see a lot of momentum around the VPN-1 UTM.

At the same time, activities that we do with our strategic account programs and our high end accounts do contribute more to the VPN-1 power line.

So just like Eyal said, I think there is potential in both of them.

We were blessed in the fact that we serve a very wide audience in terms of customers and market segments and so on, and it's critical to our strategy that we'll serve all customer segments with the high quality and capture the opportunities available to us in all the market segments.

Okay.

Thank you.

Thank you.

At this point, we have time for one question.

Our final question will be coming from [Eric Sabagar] of Pacific Growth.

Good afternoon or good day.

First off, just on Asia, I understand it was seasonally weak but it was down year-over-year.

Were there any other issues going on in Japan that would have caused some additional weakness?

Japan wasn't doing as well as we'd like to be, but that's a continual process that we started to improve by installing new strategies and new management in Japan in the middle of the year.

The rest of Asia actually did pretty well.

China we had very high growth year-over-year.

India and the rest of Asia did pretty well, so I think the number that you may be looking at, the main impact is Japan and the rest of Asia is actually doing pretty well.

The market in Japan is still healthy?

You're just taking care of some kind of internal issues, you think?

I don't know if it's the market is healthy or not.

I think that we have execution issues in Japan for several years.

Many of them relate to the Japanese culture, and the success that we had in Japan.

The key issue was that we had great success in Japan and our channel and our people were very reluctant to change and grow together with the rest of the world, and as you know in Japan, creating change is more difficult than any other part of the world, I think now we have new management, but understand the challenge extremely well, very motivated to create that change.

But we have to remember that creating a change in Japan also takes longer than any other country, so I don't know exactly when we are going to see the results but I can tell you that the enthusiasm there and the change of attitude is evident every day.

Okay.

Secondly, the messaging security market, we saw some consolidation recently there.

Any comments in terms of whether customers are asking for Check Point to bring in some kind of messaging security technologies or any thoughts on that front?

First, I think we're going to have some of that in future generations of our UTM based software, so that's going to address some of that, not maybe in the foreseeable future.

Not immediately, but it's in our plans.

On the more bigger area of having -- having appliance and things like that, [Inaudible] recently, that's not in our plans there right now.

We will look at it in two contexts within Check Point.

One context is within the UTM space, with which we are likely to have capabilities like that, and another context is the data security space in which case I think some of that, that actually goes in the outbound direction, not in the inbound direction.

It's part of our two or three year road map.

Very good.

Thank you very much.

Thank you.

At this time, I would like to turn the floor back over to Eyal Desheh for any further or closing remarks.

Well, thank you.

Thank you, everyone for your participation with us today.

If you want to speak to management and -- or to our Investor Relations following this call please call our Investor Relations department at area code 650-628-2050.

Again, 650-628-2050 and we will be happy to take your calls.

Also, I'd like to remind all of you that we are hosting our investor day event for 2007 on February 15, in New York, in the Reuters building.

I will look forward to seeing all of you over there for more details about our strategy, about our technology, about our new product, and about financials for 2007 and beyond.

We'll be very, very happy to meet all of you in a few weeks.

Thank you very much.

And good-bye.

Thank you.

This does conclude today's Check Point Software Technologies conference call.

You may disconnect your lines at this time, and have a wonderful day.