Check Point Software Technologies Ltd (CHKP) 2007 Q1 法說會逐字稿

Good morning.

My name is Shawanna and I will be your conference operator today.

At this time, I would like to welcome everyone to the Check Point Software Q1 2007 Earnings Conference Call.

(Operator Instructions.) It is now my pleasure to turn the floor over to your host, Ms.

Anne Marie McCauley.

Ma'am, you may begin your conference.

Thank you, Shawanna.

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 first quarter results.

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

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

The replay will be available through May 10.

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 regarding our financial performance and growth for 2007, our beliefs regarding the integration of Point Tech and NFR into Check Point, and the integration of their products and technologies into Check Point's products, and our belief that our performance, execution, and robust product--portfolio of existing and new products positions us well for future growth in 2007.

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, 2006, 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 a financial review.

Well, thank you very much, Anne Marie.

Good morning and afternoon, everyone.

I would like to share with you our good first quarter results, provide details of the financials, and offer a brief update on our recent acquisition integration efforts.

Our first quarter results were fueled by healthy business performance and marks a good start to 2007.

We have put in place many new initiatives over the past year, including both the internal development of products and services, as well as acquisitions.

And these investments are providing initial results, as evidenced by our first quarter financial performance, and we expect this trend to continue in 2007.

Before I dig into the numbers, let me remind you that our first quarter GAAP financial results include in process R&D charge related to the acquisition of Protect Data, the impact of SFAS-123R, the inclusion of equity based compensation expenses in the P&L, and acquisition related expenses for Protect Data and NFR, which we include for the first time in Q1, and well as for Zone Labs, which was included in the past.

In our press release, which has been posted on our website, 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 the first quarter of 2007.

Revenues for the first quarter were $164 million compared to 134 million in the first quarter of 2006, an increase of 23%.

This, by the way, was our highest reported quarterly revenue ever.

Our network security business contributed $146.5 million to revenue, an increase of 10% compared to the first quarter of 2006.

Our data security business, which includes business generated by our Point Tech product line since January 18, contributed 17.5 million to revenues in Q1.

Keep in mind that the reported data security revenues would have been higher without a purchase accounting treatment.

As such, the comparative growth for the data security business would have been greater than 60% year-over-year without the acquisition impact.

GAAP net income for the first quarter of 2007 was $47 million, compared to 62 million in the first quarter of 2006.

The primary difference in GAAP net income in the first quarter of 2007 compared to the first quarter of 2006 is an acquisition related in process R&D charge in the amount of $17 million for Protect Data and the inclusion of acquisition related amortization in the net amount of $5.4 million, resulting from the acquisition of Protect Data and NFR.

Total gross amortization amount for the quarter was $9 million.

Most of this amount is included in GAAP cost of sales line.

Net income in the first quarter of 2007 also includes equity based compensation expenses pursuant to SFAS-123R of $8.3 million.

Non-GAAP net income, excluding acquisition related and equity based compensation charges, was $79 million, an increase of 5% compared to the first quarter of 2006.

Total GAAP operating expenses for Q1 were $119 million.

Excluding equity based compensation and acquisition related charges of 34 million, operating expenses were 85 million, compared to 59 million in Q1 last year and 69 million in Q4 last year.

This amount includes $15 million of expenses related to Point Tech and $1.5 million of expenses related to NFR.

So our expense level without the acquisition was similar to Q4 2006.

The increase in expenses is a result of important headcount growth.

Specifically, we added 246 Point Tech employees during Q1.

Our total headcount at the end of the quarter was approximately 1,860 employees.

Our effective income tax rate was approximately 19%.

On a non-GAAP basis, tax rate was 15%.

GAAP earnings per diluted share for the first quarter of 2007 were $0.21, compared to $0.25 last year.

These GAAP earnings include acquisition related in process R&D charge of $0.07, and with the compensation expenses pursuant to SFAS-123R of $0.04, and other acquisition related expenses of $0.03.

And finally, non-GAAP EPS for the first quarter of 2007, excluding acquisition related and equity based compensation charges, were $0.35 compared to $0.31 last year.

This is an increase of 13%.

Deferred revenues this quarter were $238 million at the end of the quarter, an increase of $34 million, or 17% over Q4 2006, and an increase of $60 million, or 33% over Q1 2006.

With the consolidation of Protect Data pursuant to its acquisition in January, we added approximately [$13.3] million to our Q1 deferred revenue.

In addition to data security business, Zone software subscription, CES, SmartDefense, and consumer business all contributed to an unparalleled growth in deferred revenues for the first quarter of 2007.

For the first quarter, our days sales outstanding, the DSO, were 66 days compared to 61 days in Q1 last year, as our business continued to be backend loaded.

Cash collection continued to be good in the first quarter.

We generated cash flow from operations of $110 million.

Our cash and investment balance at the end of the quarter was $1.1 billion.

Please keep in mind that we paid over $600 million in cash for Protect Data shares, and continue to buy back our shares for $56 million, which is 2.3 million shares that we purchased during the quarter.

The acquisition of Protect Data had a significant impact on our balance sheet.

Total purchase price was $615 million.

As a result of the acquisition we recorded $177 million of amortized intangible assets and 200--and $421 million in goodwill.

In addition, $17 million of in process R&D was written off this quarter.

We also recorded deferred tax liability in the amount of $53 million resulting from this acquisition.

This amount is also included in the balance sheet goodwill.

Our first quarter revenues again were well diversified with the Americas contributing 44% of revenues, EMEA contributing 45%, and Asian Pacific and Japan region contributing 11%.

As you can see, Europe had a particularly strong contribution this quarter, and Jerry will address the geographic business in more detail.

During the quarter we successfully integrated NFR security and its intuitive prevention technologies into Check Point.

IPS-1 is now part of the Check Point product family and our unified security architecture.

We have successfully integrated NFR's product, services, and employees into the company, and we are leveraging the new technologies to offer customers and partners the opportunity to further enhance Check Point's NGX unified security architecture and strengthen network defenses for enterprises worldwide.

On January 17, we completed the tender offer acquisition of Protect Data, the owner of Point Tech.

We now own 98.6% of the shares and expect to purchase the remaining 1.4% within three to six months.

The additional Point Tech solution to Check Point's product portfolio marks the first significant step into data security market.

We've made many [good] steps towards completing the integration between Point Tech and Check Point.

The major goal of the integration plan is to make Point Check an integral part of Check Point and not a separate business unit.

Starting in April, Point Tech's sales force is integrated into the Check Point region and we have a unified sales force with data security experts in most locations.

Point Tech management has been playing an important role in contributing to this process, as well as the Check Point overall business.

Several members of Point Tech management have also assumed corporate roles within Check Point.

In summary, we are pleased with the financial results we posted this quarter.

We believe that our performance and execution have improved, and that the robust portfolio of existing and new products we have accumulated position us well for further growth in 2007.

I will now allow--or let Jerry and Gil speak more about our business and our plans.

Jerry, please go ahead.

Thank you, Eyal, and hello, everyone.

I appreciate you being on the call today and for your interest in Check Point.

Eyal has provided some additional insight into our financial performance, and therefore, I will spend my time focusing on some of our key business activities this past quarter.

On our last earnings call and during the investor day earlier this quarter, we mentioned that the first quarter was going to be a very busy one for us with a launch of new products as well as the introduction of recently acquired products into our channel and our field organizations.

Well, all of these actions have transpired and our first quarter results provide an initial indication of the success of our efforts.

Let me take a minute to highlight some of the first quarter initiatives.

I think one of the most important elements is the continuation of our strategic initiative to broaden our solution set in line with our customers' input as to what they need, and from the type of vendor they want to provide them their security solutions.

You can see from the financial results today that we are now providing solutions across two key security segments - network security and data security - yet within our unified security architecture.

This is a powerful and currently unique combination of solutions that addresses our customer needs in a meaningful fashion.

Our customers tell us that they want a comprehensive set of security solutions that will be managed by a single security [console] and from a company purely focused on security.

This point is made time and time again in meetings we have with our customers all over the world.

While they want a more secure operating system and their routers and switches to be more secure, they say they also need an independent layer of security that ensures the entire enterprise is protected, and they want it from a company focused on security - a company like Check Point.

On February 6, we launched Check Point's UTM-1 security appliances to address the mid-market.

A powerful new line of unified threat management appliances with multilayered protection against Internet threats, and based upon our proven enterprise security expertise and our vision as unified security architecture for businesses.

The appliances are easily deployed and include built-in security management capability.

We conducted close to 100 sales seminars worldwide for our partners and customers during the quarter and we are very pleased with feedback we have received in the short period of time the appliances have been available.

We also launched NGX R65, the newest version of our core network security technology, which extends the unified security architecture with enhanced features and performance.

This new version significantly reduces the complexity of enterprise network security management.

It also includes the ability to add security management plug-ins for better integration of current and future security functionalities, expands internal securities through a network access control functionality, and includes new features, such as web filtering, voice-over-IP enhancements, additional security protection, and more.

And the VPN-1 Power models under NGX R65 set a new industry standard for security performance for combined firewall and intrusion prevention speed through an open server - 12 gigabit per second for firewall throughput and up to 5.1 gigabit per second intrusion prevention throughput.

Another key achievement is that Check Point Integrity achieved prominent EAL4 U.S.

Government Certification.

Our endpoint solution was certified for endpoint firewall, applications, instant messaging, and spyware security.

Check Point is now the only security vendor certified for all critical network security categories - Firewall, VPN, IDS, IPS, endpoint security, and for our data security products.

We believe that we now own the largest number of EAL4 certifications of any security vendor in our industry.

During the quarter we saw the continued success of our subscription support programs.

This includes our collaborative enterprise support program, a support program that 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.

And we had very good success again this quarter with our SmartDefense service, which has become a very robust offering since its initial introduction a number of years ago.

You can see the success of these programs in subscription and support revenue and in the strength of deferred revenues.

During the quarter we had a healthy number of large deals, which is transactions greater than $50,000, as they accounted for 23% of total orders.

In the quarter, we had 10 deals between $500,000 and $1 million, and five deals which were greater than 1 million.

In addition, we continued to grow our install base, adding over 19,000 gateways, bringing the total to over 575,000 security gateways.

This included a number of major competitive wins.

Geographically, we had good results.

But we were especially pleased with the strength of the business in the Europe Middle East Africa region.

This geographic region had a very strong quarter across all product segments, including product sales, as well as subscription and support.

We are also pleased with the success of our new products and their adoption by our channel and many customers, including a number of major wins in government, technology, and financial sectors this past quarter.

The plan going forward is to continue to refine our strategy as necessary and stay focused on execution.

We have a vision that resonates with the market, and is one that we believe will lead to continued success in the market.

Thank you, again, for being on the call with us today, and I would now like to turn the call over to Gil Shwed.

Thank you, Jerry, and hello, everyone.

In the first quarter we launched our new team of pure security from Check Point.

This team highlights our commitment and focus to provide our customers and partners with the architecture, technology, and solution on which they can build their future IT security infrastructure.

The success in the quarter came from both our network security solution and from our expansion into data security, both contributing to the 23% growth in revenues and [33%] growth in deferred revenues over the first quarter of 2006.

But pure security is not just a team.

This is truly a focus that makes Check Point unique in this marketplace.

In the quarter we proved our commitment to this strategy by launching many new products and initiatives that are the building blocks for our future quarters.

We acquired Protect Data.

That is the Point Tech product line.

We completed the acquisition of NFR Security and added new leading technologies in the field of intrusion detection and prevention.

We launched a new version of our core product suite, NGX R65, adding important management security and performance capabilities.

Finally, we launched a new family of unified threat management, UTM1, having the best and most integrated solution in this space.

These combined efforts demonstrate our progress in achieving the holy grail of security - a single integrated management console that can manage all layers of security in a consistent, reliable, and a secure manner.

This new generation of the unified security architecture will make the security consistent across the entire network layer - our remote users, security gateways, and endpoints within the network - and expands the data security layer to minimize the risk of data loss and leakage.

While we started to see the success of our strategy this quarter, this is only the first step, and most of the challenges, opportunities, and results for these activities are ahead of us.

For the second quarter of 2007, we expect revenue to be in the range of $166 to $176 million.

We expect the GAAP EPS to be in the range of $0.26 to [$0.31] and non-GAAP EPS, excluding the effect of stock-based compensation and acquisition related charges, to be in the range of [$0.33] to [$0.38].

For the year, I'd like to reiterate our full year outlook and provide GAAP EPS.

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

GAAP EPS is expected to be in the range of $1.04 to $1.18.

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 believe that our pure focus on IT security positions us strategically as the provider customers rely on today and in the future as we build out their IT security architecture.

We are pleased with our performance during the first quarter and believe that we are well positioned for a successful 2007.

Thank you all.

And with that, I'd like to open the call for your questions.

(Operator Instructions.) Our first question is coming from Sarah Friar with Goldman Sachs.

Please go ahead.

Good morning, guys.

Thanks a lot for taking my questions.

Eyal, can you give us any further color on how the Point Tech total revenue split out across effectively your three line items?

So in particular, how much was products versus how much fell into something more like subscriptions?

You will notice we have provided information about the data security business, which is the Point Tech product line.

We didn't break it--we didn't break it out.

The component of products at Point Tech is, of course, higher than Check Point.

But that breakdown is not available.

But can you give us any sense?

Is it an 80/20 split?

Kind of product maintenance--?

--It's not 80/20.

It's less than that.

Okay.

And then, in terms of the margins, it looks from your guidance you're kind of assuming margins are going to start to pick up again as you get Point Tech integrated and so on.

What do you think is a good sustainable margin for Check Point as we think through '07 and into '08?

Let us--remind us that we have the best margins in the industry.

And we are not giving margin forecasts.

You have been following for many years.

You remember that we never get real focused on margins.

Obviously, Point Tech joined in with a lower margin than Check Point had before the combination and that was the result for the margin of this quarter, which is exactly within the expectation of where we thought.

There is some room for improvement here, but we focus on driving revenues, net income, and earnings per share, and not driving the margin.

Okay.

And then, just one final one for you.

The support and training revenues really jumped up.

And maybe it's a question more for Jerry on the success you're having there.

I mean, how do you balance that with also working with partners and making sure that you're not taking away support and training revenue from them?

Well, as I said in the introduction of the program, we built this over an extended period of time and we built it with our partners.

And we're sharing the revenue, but we're also sharing the expenses.

And we're giving our total customers a much better experience with the support that they receive by doing it jointly.

And it's been very well received.

Like I said, we've done this on a rollout basis, started in Europe, we're going to Asia.

We fine-tune the program as we go forward.

But it's been very, very well received by both customers and partners because it's very positive for them and for us.

Okay.

And so, is the goal--because of the U.S.

you kind of said you already were doing effectively--or you had a balance in place--maybe seen as less relevant in the U.S.?

As you've now had the rollout and Asia and Europe get more mature, do you see ways to bring it to the U.S.

in a different form?

Well, maybe in a different form, maybe a similar form.

It may be modified somewhat.

We continue to work with our partners here.

But we do it geographically based upon the needs of the customers and the partners in those geographies that we've evolved into.

I mean, there is no one program we do I think consistently around the world.

We try to tailor it to the marketplace and the requirements, the language, the culture, the capabilities that people have.

So we will continue to also enhance the services and support that we provide the U.S.-based customers like we have those in the rest of the world.

And exactly what form that takes, I don't think we know right now.

But it's some combination of the programs we have in place, which we think is going to have a positive impact on our revenues, as well as our partners' revenues, and our customer satisfaction.

Okay, great.

Thanks a lot.

Thank you, Sarah.

Thank you.

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

Please go ahead.

Hi.

Good morning and good afternoon.

Nice quarter.

One question, Gil, for you.

You talked about integrating the sales force into--from Point Tech or Protect Data into the Check Point channel.

Are we to assume yet that the Check Point traditional sales reps will also be taking on the new product line?

And then, a question for Eyal.

If you could just comment a little bit about taxes and where you think that's likely to go.

Thanks.

Yes.

The Check Point channels and the Check Point sales force are all going to carry, promote, and sell their Point Tech products.

It's right now on our price list.

And all channels around the world can sell it.

And we've started the process of training the sales people.

We've started a process of training the channel.

And the way it's going to work for the Check--the Point Tech dedicated data security experts are going to grow their support and grow the accounts which they've been serving and the pipeline that they've been building, and also be a regional resource that can help the entire team around them learn how to do that and direct even more opportunities that they can do [indiscernible - accented].

Robert, regarding your question on taxes.

As you've seen, our GAAP tax rate was 19% this quarter - a little higher than usual.

Our non-GAAP tax rate was 15% this quarter - lower than usual.

This has to do with the--with some of the acquisition related expenses that we had in the P&L.

In general, we focus on the non-GAAP taxes.

It could be within that range, maybe a point or two higher later on this year, but that is the area.

Thank you very much.

Thank you.

Our next question is coming from John Walsh with Citigroup.

Please go ahead.

Good morning.

Could you give us an update on the competitive environment?

Any change with pricing or anything you've seen on the competitive front, particularly within the U.S.?

Let me take that.

I--not really, John.

It's still a competitive marketplace.

But we're doing well out there.

I'm very pleased with our position and our success.

We had, as I talked about, a number of major, major wins.

There isn't anything that isn't competitive.

We had good overall numbers, big accounts.

Geographically, like I said, it was across governments--we did some real nice business with the U.S.

government again this quarter across that product line.

Financial sector, technology companies.

It really was across the spectrum, both geographically--we said Europe was very strong.

So I'm very pleased with our position in the marketplace and how well we're doing.

As I said, and I don't want to repeat all of my comments, I just think we're very well positioned with our vision, with our strategy, with our product set, and the needs that the customers have of working with a security vendor as an independent layer on top of everything else they're doing.

And I like that position.

I think the marketplace does, our partners do, and I think it's going to continue to be our focus, which I said is now on execution of what we're doing.

Okay.

And then, now that you're in the market for a couple of months with the VTM-1 appliance product, any sense of there's--any concerns about channel conflict, that--now you are selling an appliance relative to what some of your partners offer and putting it on their hardware?

And then, any sense of the revenue contribution from that product for the full year?

Do you expect it to be less than 10%, 5 to 10% of the 2007 revenue?

Thanks.

I'll let Eyal get the second part of the question or Gil.

But on the first part, no, John, there is not a conflict.

And one of the things that they know and we know and we talked about and maybe it took us a while to get there, is that we're filling a void in the marketplace.

We went to a price point that our partners really did not address and could not address.

They were at the higher end of the market and not really addressing the midmarket, which is why we took the steps that we did.

We were the ones that were capable of putting together the right set of solutions, the pricing, the packaging, et cetera, to fill a void that was in the marketplace.

There's an opportunity in the marketplace that we wanted to address that our partners were focused in a different segment, a higher end segment.

So this is very complementary and it is not competitive with them.

And we don't have a problem with either one of the major ones or any of the open server guys.

Regarding the second part of your question, you have to understand that the product has been less than two months in the market from launch.

Sale cycle is not very long on this product, but it's not zero.

And pipeline is--continues to be built very nicely.

For your question, yes, it's less than 10% of our business at this point.

Okay, great.

Thank you.

Thank you.

Our next question is coming from Sterling Auty.

And we do ask that you limit your questions to one question.

Yes, thank you.

You mentioned in the prepared remarks that you were going to give some additional color on the strength in Europe.

I didn't quite understand the detail behind it.

Is it because of the geographic contribution of Protect Data, or what else did you see in the marketplace during the quarter from that region?

Well, maybe I didn't give enough color there, Sterling.

I apologize for that.

No, it was across all products.

Network security products--it was product sales, it was subscription, it was SmartDefense, it was support, it was across the countries in Europe.

We just saw a very, very strong business environment there.

I think we did well in most of the places and we were--in an absolute sense we were okay.

We just--relative--Europe was very, very strong, just the entire environment.

I think our execution, the team we have in place there, was exceptional for us.

We are very pleased with what happened.

And it was really across the board geographically and from a product set standpoint.

There was no one individual area that caused them to outperform the other regions.

It was just a combination of everything, as I said, across geographies, across products, both network security and data security, as well as subscription and support and SmartDefense.

Thank you.

Our next question is coming from Walter Prichard with Cowen.

Please go ahead.

Hi.

Excuse me.

Sorry for the background noise.

I was just wondering, Eyal, on the services lines, it sounds like CES was very strong in the quarter.

I was wondering if you classify the maintenance for Point Tech data and services, and that's had any impact on services.

Yes, there is--but definitely the major driver of this--the growth in services revenues was the CES program.

The majority of the growth is coming from there.

And just a follow-up.

Are we now at the point where--I know you sort of had a staggered impact of rolling that out over two quarters or so where in Q4 you saw some impact and in Q1 you saw some impact.

Are we now in kind of a steady state in terms of the impact of CES and it grows more steadily from here in that services line?

I don't know what's the meaning of steady state in this type of business.

But just don't forget we have deployed the program right now only in EMEA and Asia.

And Q2 was the one--was the first quarter that we made with the--.

--Right.

We don't have four quarters yet.

So we don't have yet the four quarters.

And like Q3 or Q4 when we are going to end the cycle, a full year into the new program--that's going to be somewhere between Q3 and Q4.

Our next question is coming from Todd Raker with Deutsche Bank.

Please go ahead.

Hey, guys.

On the new businesses, can you quantify the impact of NFR in the quarter?

And when you gave guidance around Point Tech for the full year - 95 to 105 million - are you still comfortable with that range?

Well, as for the numbers [indiscernible - accented] were not very meaningful in the quarter.

This is a longer cycle and we're building it, but we're very happy with the progress.

Regarding Point Tech, yes, we see no reason at this point to change that original guidance.

Okay.

And one quick follow-up.

Large deals - five of them over 1 million - that's actually up sequentially from your year end.

Is that core business?

Is that Point Tech?

Can you give us some insight into that?

[Indiscernible - accented] all of those five deals came from Check Point network security business.

Okay.

Thanks, guys.

Thank you.

Our next question is coming from [Amit Yonay] with ING.

Please go ahead.

Hi, guys.

A question regarding the market.

You indicated that there's a growing demand for unified solutions.

Can you maybe talk more about specific demand for certain products, such as--I'm sure you mentioned it, but just elaborate a bit, such as intrusion detection?

And UTM, is it picking up as you expected or--and the same goes for Firewall and VPN.

How do you see this market evolving?

Firewall and VPN are an integral part of our UTM1 solution and our entire VPN or UTM family, which is a bigger family.

And, yes, we do see an increased demand for some of these functionalities and some of these solutions.

And IPS capabilities are also part of some of these products, so they are also there.

The independent IPS1 product line that we have is a new line that we are just starting.

The major announcements around these lines are actually still ahead [indiscernible - accented].

So it's not that--so the contribution there is still small and most of the work there is still ahead of us.

But overall, I think that where we saw the strength was in the overall network security market, and then, the new data security market will perform quite well in the quarter.

Okay.

Thank you.

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

Please go ahead.

Yes.

Good morning.

Looking at the Point Tech business, could you characterize what you see as relative average deal sizes compared to the network security business and also the relative sales cycles to close these opportunities?

Okay, Ed.

Hi.

The average--the relative deal size for the Point Tech product is larger than Check Point, although our five biggest deals came from network security.

But by an average--a typical Point Tech sale is bigger.

And I think also--and again, we're still learning the very fine details of the business.

But I do believe that the sales cycle is also a little longer since these products are new to the market and a customer will like to test and experiment and start on a small scale and understand they work before they go to the biggest deployment.

So we do see a somewhat longer sales cycle, but can't quantify that exactly.

And just to follow-up on the UTM products, are you seeing early adoption in kind of new deployments?

Or are you seeing some of the traditional Firewall-1 customers switching or upgrading to a UTM-1 platform?

Well, it's still too early to say.

But most of the business we are addressing and most of what we've seen so far is new deployment and new products for the UTM-1 line specifically.

And the new customers.

Yes.

Thank you.

Our next question is coming from Shaul Eyal with CIBC World Markets.

Thank you.

Hi.

Good afternoon and good quarter.

Two quick questions.

Going back to the ASP question before.

Some companies--some security related companies started to talk about some uptick with respect to ASP.

Some have taken [indiscernible - accented] by about 5 or 6%.

What's happening maybe more specifically from Check Point on that front?

Eyal--I'm going to let Eyal answer it for you because he's got the numbers there.

They're not--I think those might have ticked up a little bit, but I don't think there's been any significant changes [inaudible] 5 or 6%.

Eyal, do you have the number there exactly or--?

ASP?

Yes.

There is a mix.

And when we look at the network security business, I don't think that our ASP has changed.

It may be a little bit up because the UTM-1 products are basically driving more dollars per single sale than our previous UTM software version.

But this is still on a small scale.

So when we isolate the network security business, it's more or less the same, maybe a little bit up, but not by much.

And data security is new.

I mean, we don't have anything to compare it to and I don't think that a comparison makes sense at this point.

One trend that I can predict for the year is that we'll see an increase in the ASP of network security deals and we'll see a decrease in data security deals because we are going to approach a much [indiscernible - accented] and much more of the midmarket with the data security.

Got it.

Thank you for that.

Then just kind of--.

--Thank you.

Our next question is coming from Dino Diana with UBS.

Thanks.

Nice quarter, guys.

On the deferred revenue strength up 26% year over year when you back out Point Tech, is there any more--obviously, that's the highest I think you've had since the first quarter of 2001.

Is there any more license revenue than normal that's included in that number?

No, it's actually mostly subscriptions and subscription support and SmartDefense Let's not forget the SmartDefense program, which is not a maintenance or a support program.

It's security update and it's just an annuity program.

So, I mean, these are the three contributors.

I don't think that we've seen much product in deferred revenues this quarter.

Very little.

Very, very little.

Okay.

And then, on the UTM side, obviously, the checks have been good so far for the first two months.

Do you have any idea when this could be--I mean, whatever metric you want to throw out--maybe like a $1 million per quarter run rate business?

Is it far off from that?

Oh, yes.

It's much more than that already.

It's much more than that already.

Okay.

Any sense for how big that was or what it can be?

It's too early, but it's much more than that.

[Multiple Speakers.] And we got a question before if it's more than 10% of our business.

We said it's less than 10%.

Oh, okay.

More than 1 million.

It's more than 1 million and much less than 10%.

Got it.

I got it.

Okay.

Thank you.

You're welcome.

Thank you.

Our next question is coming from Katherine Egbert with Jefferies.

Please go ahead.

Thanks.

Good morning.

What do you expect for Point Tech for next quarter and will you break it out?

We will break it out.

Well, yes, I think what we expect is to see in line with our expectation of a little over 100 million for the year, which means we would like to see growth in Point Tech, but we're not providing [inaudible - audio glitch] the specific breakdown.

It will grow over what we [inaudible - audio glitch].

Two reasons.

One, we believe that the business is growing [inaudible - audio glitch].

In Q1, we only--we didn't have business for Point Tech for the first three weeks of January because we [inaudible - audio glitch].

Got it.

Thanks.

Thank you.

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

Please go ahead.

Hi, guys.

Good quarter.

Eyal, I just have a quick question on I guess U.S.

versus European GAAP and if that had any effect on just sort of the--how you recognize call it the Point Tech license revenue versus how Protect Data did previously.

We've typically seen--when we move over to U.S.

GAAP, companies have to ship more into services and subscription deferred revenue versus Europe GAAP.

Did you have a similar effect this quarter in this business?

Yes.

I would not--I would not describe this as meaningful.

Yes, there are differences between the U.S.

GAAP and the international GAAP that Point Tech has been using.

But I don't think that this is meaningful as to say that it had a major impact on results.

And this will go away within a few quarters anyway.

The difference is that, yes, international GAAP is a little more liberal in revenue recognition.

And we applied very strict U.S.

GAAP to the numbers, so might find a little bit more in deferred than the usual.

But I can't say these are meaningful numbers.

No.

Okay.

And then, also, just on the deferred revenue line.

You mentioned 13 million coming from Point Tech.

How much of that was just from the purchase accounting versus actual incremental deferred revenue growth during the quarter from Protect Data?

This is all--this all came from purchase accounting.

Okay.

This does not include the regular--the business during the quarter.

This is the one step-up that we've done when we added the Point Tech deferred revenue--our balance sheet.

After, of course, we have adjusted it, the number is smaller than what they had because purchase accounting you have to reduce it according to a formula.

So this is the one-time step-up.

The rest was ongoing business.

And, of course, we continue to generate business and grow it.

Perfect.

Thanks, guys.

You're welcome.

Thank you.

Our next question is coming from Ehud Eisenstein with Oscar Gruss.

Please go ahead.

Hi, guys.

Nice quarter.

Thanks for taking my call.

One of the goals for this year is to focus on the medium size business.

Can you give us some sense how that worked for you in the quarter?

And secondly, we would appreciate an update on Japan.

Thank you.

We've been very active in trying to promote our mid-size business.

Now, let's remember, we define mid-size--selling mid-size solutions, not necessarily we think that some larger accounts will buy mid-size products and some small and mid-size accounts will buy the same mid-size product.

So we've been pretty active in promoting that message.

I think that with the UTM-1 and the success that we have for UTM-1 we are starting to bear the fruit of talking about that.

In Japan, I think we're still recovering from a few tough years.

But this quarter I think was an order of magnitude change in the business in Japan.

It performed better than our plan for the year.

And hopefully, within a quarter or two we are going to start seeing reemergence and growth in Japan again.

Excellent.

Thanks so much.

Thank you.

Our next question is coming from Israel Hernandez with Lehman Brothers.

Please go ahead.

Good morning, everyone.

Just a question on the rollout of Point Tech into the channel.

How far along are we on that process and when do you think we'll start to see meaningful acceleration in production out of the channel?

Because it seems that that's a pretty significant opportunity.

And the second question here is how is Point Tech being integrated into the operations of Check Point?

Is it pretty much being left as a standalone business, or are we deep into an integration within the Check Point fold?

Thanks, guys.

I think we've addressed a little bit both of these on the previous [facts].

But let me try and reiterate that.

The Point Tech product is available to our channel, but we're only in the beginning of training, educating, and promoting it.

So every channel partner can order Point Tech products, every channel partner can sell the Point Tech products, and we are starting to--.

--We're seeing some orders already--.

--We're already seeing some orders, but it's still very small volume.

I expect that between Q3 and Q4 we are going to see more meaningful contribution for the Check Point channel for the Point Tech product.

Point Tech isn't going--it is already integrated into the Check Point structure.

It's not going to be an independent or a separate unit.

The Check Point--the Point Tech salespeople are--become part of the Check Point's region.

And they also--and they will continue to serve the customer--their customers and work on the large deals, but we're also going to support the entire area--or the entire geographic area in which they are and help the Check Point people in the Check Point channel promote that message and grow that business in the different regions.

That's probably true also for many other functions that are there.

I mean, the Point Tech products organization is part of the Check Point products organization and these are the two big organizations.

Most of the other organizations are going to be just combined and embedded because we are not dependent or we'll not stay [anywhere standalone].

Thank you.

Thank you.

I would now like to turn the call back over to Eyal Desheh.

Well, thank you very much.

Thank you, everyone, for your participation.

If you want to speak to Management or Investor Relations following this call, please call our Investor Relations Department at 650-628-2050 and we will be happy to take your calls and return them.

So thank you, again, and we'll talk to you in three months.

Bye-bye.

Thanks, everyone.

Thank you.

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

You may now disconnect and have a great day.