Check Point Software Technologies Ltd (CHKP) 2007 Q3 法說會逐字稿

Ladies and gentlemen, good morning.

My name is Melissa and I'll be your conference operator today.

At this time I would like to welcome everyone to the Check Point Software 2007 third quarter earnings conference call.

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

After the speakers' remarks, there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Kip Meintzer, Director of Investor Relations.

Sir, you may begin your conference.

Thank you.

Good morning and afternoon to all of you joining us today.

This is Kip Meintzer, Director of Investor Relations for Check Point Software.

On the call with me today are Gil Shwed, Chairman and CEO, Jerry Ungerman, Vice Chairman, and Eyal Desheh, Executive Vice President and Chief Financial Officer.

We would like to thank all of you for joining us today to discuss Check Point's third quarter results.

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

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

For your convenience, the third quarter results replay will be available through November 5th.

If you'd like to reach us after the call, please contact Investor Relations at 1-650-628-2050.

Now, before we begin with management's presentation, I would like to bring the following disclaimer to your attention.

During the course of this call, Check Point representatives will make certain forward-looking statements.

These forward-looking statements include statements regarding Check Point's expectations that the Company's pipeline of data security business is healthy for the fourth quarter and beyond, expectations that it continues to execute on its strategic initiatives in the fourth quarter and beyond, belief that it will continue to focus on the execution and development of further products with a pure focus on security, and that it will introduce leading-edge products which our customers will adopt, expectations for its financial performance and growth for the fourth quarter of 2007 and full-year results.

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 its forward-looking statements.

Now I'd like to turn the call over to Eyal Desheh, Executive Vice President and Chief Financial Officer.

Thank you very much, Kip, and hello, everyone.

I'm happy to open the review of an excellent quarter and what so far seems like an excellent year for Check Point.

This was a record quarter from a revenue, non-GAAP net income and non-GAAP earnings per share perspective.

We also surpassed the high end of our projections as we continue to demonstrate solid annual and sequential growth across all of our revenue segments as customers continue to realize the value of our unified security architecture and pure focus on security.

We believe third quarter results continue to demonstrate the success of the strategic initiatives we've implemented over the past 18 months and we are very proud of this accomplishment and the contribution made by Check Point's employees and our partners.

Before I delve further into the numbers, let me remind you that our third quarter GAAP financial results include the following: equity-based compensation expenses pursuant to SFAS 123R, expenses related to the acquisition of Protect Data and NFR which we include in our 2007 results but were not included in the previous years, as well as expenses related to the acquisition of Zone Labs, which were included in the past.

Keep in mind that non-GAAP information is presented excluding these items.

In our press release, which has been posted on our Web site, we present GAAP and non-GAAP results along with reconciliation tables which highlight this data as well as the reasons for our presentation of non-GAAP information.

I would also like to draw your attention to a change we implemented in the way we report results.

We have updated our financial statement reporting in accordance with the latest reporting standard.

We now combined the software subscription line with the services line and it's now called software updates, maintenance, and services.

We also split the cost of revenue line in order to present separately cost of products and licenses, cost of software updates, maintenance, and services and amortization of technology.

Now let's take a look at the financial highlights for the quarter.

Third quarter revenues were $184 million, an increase of 29% compared to $142.5 million in the third quarter of 2006 and a 4% sequential quarterly increase.

The network security business drove a lot of growth, contributing a record of $163 million to revenue, an increase of 15% compared to the third quarter of 2006 and 5% sequential quarterly increase.

The data security business contributed $21 million in revenue fueled by large deals in the U.S.

including strong business volume and a number of large orders from the U.S.

government.

GAAP net income for the third quarter of 2007 was $77 million, an increase of 8% compared to $71 million in the third quarter of 2006 and a 10% sequential quarterly increase.

GAAP net income in the third quarter of 2007 includes acquisition-related charges resulting from the acquisition of Protect Data and NFR that were not included last year in the total amount of $6.5 million net of taxes.

Non-GAAP net income was a record high of $92 million, an increase of 17% compared to the third quarter of 2006 and a 7% sequential quarterly increase.

Total GAAP operating expenses for the third quarter were $106 million.

Operating expenses on a non-GAAP basis were $88 million compared to $64 million in the third quarter last year and similar to the second quarter of 2007.

Our expense control continued to improve as demonstrated by our non-GAAP operating margin of 52%, up from 50% in the second quarter of 2007.

Our effective GAAP and non-GAAP income tax rate was approximately 14% and 15%, respectively.

GAAP earnings per diluted share for the third quarter of 2007 were $0.34, an increase of 10% compared to $0.31 last year.

GAAP earnings per share this year included approximately $0.03 which was not included last year.

These GAAP earnings includes equity-based compensation expenses of $0.04 per share and acquisition-related charges of $0.05 per share.

Net of taxes, these charges total $0.07.

Non-GAAP earning per diluted share for the third quarter of 2007 were $0.41 compared to $0.34 in the third quarter of last year, an increase of 21%.

This is the highest earnings per share on a non-GAAP basis that we reported in our history.

Deferred revenues this quarter were $227 million, an increase of $54 million, or 31% over third quarter of 2006 and a seasonal decline of $9 million sequentially.

For the third quarter, our days sales outstanding, DSO, was 67 days compared to 68 days in the second quarter of 2007.

We continue to see an increasing number of large deals which tend to close towards the end of the quarter.

We generated cash from operations of $89 million, an increase of 18% compared to Q3 last year and ended the quarter with $1.2 billion in cash and investments.

During the quarter we also purchased approximately 1.8 million shares for a total cost of $42 million as part of our share repurchase program.

Moving forward, we have approximately $135 million remaining from the $1.2 billion cumulative board authorized share repurchase program.

That's all for me.

Now let's turn the call over to Jerry for some further commentary.

Jerry, please.

Thank you, Eyal, and hello, everyone.

Following Eyal's comments, I would like to provide you with a little more color on our key business activities over the past quarter.

During the quarter we continued to experience solid demand across our product lines, of which we had a particular standout that contributed to further growth in the third quarter.

Once again, the UTM-1 products continued to shine with double-digit percentage growth increases for the quarter.

We also saw a continued trend of an increasing number of large transactions coming from some of the largest companies in the world from a variety of different sectors and across all geographies.

Transactions greater than $50,000 accounted for 40% of total order value and 15 customers that had transactions with a value greater than $1 million each.

This group included some of the world's largest financial institutions, consumer goods manufacturers, telecommunication companies, and government agencies.

These network security and data security transactions represented a combination of new sales, further sales into our installed base, and the displacement of competitors.

We also continued to experience geographical revenue distribution consistent with the second quarter with the Americas representing 47% of revenue, Europe, Middle East, and Africa contributing 42%, and the Asia-Pacific and Japan region contributing the remaining 11% of revenues for the quarter.

Several items I would like to bring to your attention that were announced or occurred during the quarter, which we believe demonstrates Check Point's industry leadership and commitment to a pure focus on security.

These include Gardner's recognition of Check Point in the leader's quadrant of the 2007 Mobile Data Protection Magic Quadrant report, which we believe continues to validate our continuing success and commitment to securing sensitive information with our unified security architecture and pure focus on security.

Check Point was also awarded a new government certification for PointSec Protector in the cryptography module utilizing Pointsec PC and Pointsec Mobile.

The FIPS 140-2 certification ranks among the most difficult to achieve and is required before any encryption products can be offered to government entities.

Check Point's products meet and exceed the stringent requirements established by government standards, government approval process, and security industry testing.

During the quarter we also hosted Check Point Experience events for partners and users in Asia-Pacific, Europe, Middle East, and Africa.

These events included technical and business discussions along with product demonstrations to improve technical know-how in the expertise of attendees.

And we were pleased that we experienced growth in attendance of over 30% in the European event held in Germany.

As you can imagine, we are pleased with our continued success and remain focused on executing our strategic initiatives in the fourth quarter and beyond.

Now I would like to turn the call over to Gil.

Thank you, Jerry.

Good morning and afternoon, everyone.

As you heard from Jerry and Eyal, our results in the first quarter were good and represented successful execution of initiatives in all of our business areas.

A few good examples that highlight these success are the network security initiatives such as our new UTM-1 appliances, the continued success of our annuity program and focus on major accounts, our data security business also continued to deliver results and together we posted record results in a seasonally challenging quarter.

But the most important in all these initiatives is the fact that it's all part of a single focus strategy, Check Point pure security strategy.

I have been meeting personally with many of our customers and partner at the recent Check Point Experience event, and the reoccurring [team] which keeps coming across during my conversation is that our customers are beginning to realize the benefits of our unified security architecture and that we are a strong supporter of our integrated security management platform.

Both our unified security architecture and our integrated management platform are unique in our industry.

We believe this will be even more important as we incorporate more products into the platform and deliver greater value to our customers.

Now I'd like to address the fourth quarter and the full-year projections and guidance.

In light of the good quarter that we had, we are raising our forecast for the quarter and for the year.

We expect the fourth quarter results to be as follows: revenues are expected to be in the range of $196 million to $208 million, GAAP EPS is expected to be in the range of $0.35 to $0.39, non-GAAP EPS for the fourth quarter excluding the affect of stock-based compensation and acquisition-related charges is expected to be $0.42 to $0.46.

When we translate it to an annual forecast, what we see is revenues in the range of 720 to $732 million, GAAP EPS in the range of $1.20 to $1.24, and non-GAAP EPS in the range of $1.55 to $1.59.

Overall we are very pleased with what we've seen this year so far and we are looking forward for an exciting and a lot of execution and a lot of hard work in the fourth quarter.

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

Operator?

Thank you.

(OPERATOR INSTRUCTIONS) Your first question is coming from Sarah Friar with Goldman Sachs.

Good morning, guys.

Good quarter.

Eyal, could you give us a little bit more color on the expense line?

You obviously did a terrific job this quarter on your operating margins.

As we look forward into '08, is this a good level to think about or is there a reason why you would either invest more or actually even see more leverage as we think about kind of the out year as Pointsec now gets fully integrated?

Well, first of all, we are growing our business and we're adding some more people all the time to support the growth, salespeople, development, R&D people, so you could expect our expenses to continue to grow.

It's not going to stay where it is right now.

We're also adding selling more appliances and appliances are adding some to our cost of revenue lines, as I'm sure you have noticed and have seen.

So I can see expenses continuing to grow.

Hopefully revenues will be able to grow faster.

Okay.

So the kind of the margin that we're looking at, though, is a good margin level?

I guess so, but our focus is not on the margin, you know that and we've said it so many times before.

We focus on top line and bottom line and growing both is our main priority.

Okay.

Great.

Thanks a lot.

You're welcome.

Thank you.

Your next question is coming from Jonathan [Doros] with UBS.

Please go ahead.

Hey, guys.

Of the $77 million in license, can you break that out between Pointsec and the core business?

And then maybe how much of the core business was on appliance?

We don't break the product and licenses between these two, between the data security and network security even though we said that the overall for data security was about $20 million.

Can you assume an 80/20, about?

Again, I don't want to assume.

For some portion of both, and I think we overall had a nice business in both of them and we don't have the reporting invested to break those in detail level.

I don't remember the exact percentage of appliances off our network security business, but it's growing.

I believe it represents something around 20% of our net --

24% of product sales.

24% of overall product sales right now.

And where do you guys see that going as you exit '08?

Could it hit 50?

Again, I didn't get --

Could it hit 50% of -- could appliances be 50% of product sales as you exit '08?

We didn't finish the 2008 plan yet.

Let's finish 2007.

We do expect to see the percentage of appliance increase a part of our network security sale.

At what level exactly it's going to be, that's a little too early in the game.

Great.

Thank you.

You're welcome.

Thank you.

Your next question comes is coming from Mike Turits with Raymond James.

Please go ahead.

Hi, guys.

Good morning.

On Pointsec, $21 million was roughly flat sequentially by my calculations, looks like it might have been down year-over-year.

Just any further commentary on that and are you still guiding to 95 to $105 million for Pointsec for the full-year?

So first it wasn't down year-over-year, it's up, and it's also up quarter-over-quarter.

I think what we've seen this quarter, first, we had the very good business in the Pointsec business, which specifically sees very nice growth in the U.S.

market and with some highlights with the U.S.

government deal, which is all very positive and I think shows the right trend.

Let's remember that right now the Pointsec business is still -- a big part of it is still driven by large deals and large deals are not very common in the first quarter and I think we are still targeting good contribution of that in the range that we've set for the year.

I'm not sure where exactly it will come to, but I think we've said around $100 million and we think that we will be around $100 million for the year.

You said there were some large deals booked near the end.

Are some of those Pointsec and could some of those have been off the balance sheet?

I don't know what's off the balance sheet means, but we had good deals for Pointsec with the U.S.

government.

Great.

Thanks, guys.

And welcome back, Michael.

Thank you very much, Eyal.

Good to talk to you guys.

Appreciate it.

Thank you.

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

Thank you.

Hi.

Good afternoon, guys.

Good quarter.

Two quick questions.

Eyal, deferred revenue, slightly sequentially down, is that kind of seasonality?

What's the thinking down there?

Yes, our seasonality if you look back five or even more years, you see that in third quarter our deferred revenues always go up and then they go back -- go down, sorry, and then they go back up again in the fourth quarter and this year is no exception.

It's mostly about renewal of services, support, maintenance, subscription, that most of this happens in Q1, Q4, lesser degree in Q2 and even lesser in Q3.

So that's a seasonal trend that we've been following for years and was very well within what we thought it would be.

Thank you for that.

Jerry, with respect to ASPs, I know we spoke about it last quarter, what were the trends this quarter?

Is the [tally] sequentially up?

Well, you saw the number of large deals we did and the large deals continue to increase, which does have an impact on it, but we're very pleased with the pricing in the marketplace and the value we're getting for our products.

I think it all contributes to the success that we're seeing both in number of orders, number of large orders, and the overall business level.

So it's been very positive.

Even as it relates to the core product?

Yes.

All right.

Thank you very much.

Good luck.

Thank you.

Thank you.

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

Please go ahead.

Hey, guys.

I just want to follow-up Michael's question on Pointsec.

You guys have owned that business now for three quarters.

Would you say it's lived up to expectations?

And how should we be thinking longer-term in terms of what the growth trajectory of the business can look like?

I don't know that I have the long-term projection, but right now it's striking pretty much exactly accordance to our plans and that's good.

We still have a big quarter, the fourth quarter, ahead of us and there's a lot of potential.

I don't think that we've fully unleashed the potential that we have Pointsec.

Right now we're just starting to see the benefits of our (inaudible) and we're just starting to see the deals growth by the expanded distribution channel, Check Point channel coming into (inaudible).

So far what we've seen is a big portion of the pipeline that keeps building that we've got with Pointsec so I think it's going to be an interesting market, but clearly we've not seen -- we've not unleashed all the potential within that business.

In that market, Gil, do you think you guys are picking up market share, stable market share, or losing market share on a competitive basis?

Our belief in what we are seeing is that we have a very good market share and that we are winning many deals.

I haven't seen recent reports and I don't know if necessarily we address today all the different market segments that we can, but overall I think our leadership is just right and I haven't seen any competitor becoming stronger in the past six months.

Okay.

Thanks, guys.

Thank you.

Your next question is coming from Sterling Auty with JPMorgan.

Please go ahead.

Yes.

Thanks.

I have two questions.

What do you think has been the biggest positive influence on the core business?

You mentioned the initiatives that you put into place the last 18 months, but what do you think is having the most benefit for the core business to drive this reacceleration?

I don't think it's one thing.

I think it's a combination in execution.

I think with one hand we had UTM-1 appliances that are contributing nicely.

On the other hand, we have more and more focus on major accounts that also showed very nice results.

We have a very good annuity program that we keep expanding and we also contribute there.

So I don't think that there's a single silver bullet, but the good thing that I can clearly see the influence of all the initiatives that we've executed.

And by the way, just in terms of our people execution and sales leadership that we have, I think with the people that we have today in the sales organization are doing a very good job and they are executing very nicely on that.

And I want to circle back to the Pointsec item.

You mentioned that you're still targeting that 95 to 105.

It would seem like it's an awfully big jump in the fourth quarter to get you back in that range.

What is it that you're seeing in the pipeline or elsewhere that makes you think that you can even get to the low end of that range?

I think that we have a healthy pipeline.

The Pointsec business, at least, historically, was characterized by many large deals and there is a nice pipeline of that so I hope that we will be able to meet something close to that range.

Okay.

Thank you.

Thank you.

Your next question is coming from Walter Pritchard with Cowen.

Please go ahead.

I'm wondering if you could just talk to us a little bit about the annuity business which continues to do pretty well year-over-year and sequentially.

I know there's a variety of components there with the new support program, part of it the traditional software subscription as well as the annuity stream from Pointsec.

Maybe you can just help us break down what's contributing more growth or less growth in that piece.

I think they're all growing equally in a balanced way.

The new support program that we have implemented in Europe is contributing nicely and it's 100% of the annuity business in Europe.

In the U.S.

we have a combination of the older subscription program and the (inaudible) support system program which is different.

And again, both of them are tracking pretty well.

We do have the Smart Defense program and the Smart Defense is very important because it's a new program, it's not new, it's already several years with that, but it's an (inaudible) program that gives security updates and real-time security and the Smart Defense program is actually tracking quite well and keep contributing more to revenues every single quarter.

I think we're tracking somewhere between 40 and $50 million contribution of that program on a year-on-year basis, on an annual basis and with very nice double-digit growth year-over-year.

So I think these are the big programs that keep contributing.

On top of that, I mean actually the other programs that we have like training and professional services are all tracking well but they are completely insignificant compared to these [three] programs.

Maybe I should add one more component, which is right now small, but has a very nice potential to grow.

Our UTM-1 install base is still small, but our UTM services that are being sold on top of the UTM-1 gateway.

And that number is also, as the install base grows will continue to grow into new dimensions in our annuity-based sales.

And then just a follow-up on the support program, I noted you mentioned you had not changed the program in the U.S., you're still doing a direct support program.

What is the likelihood going into next year that you move to that type of program in U.S.

as I know from '07 results, you had pretty good acceleration in that business when you made that change in Europe.

We haven't had made any changes to our model in the U.S.

only we are offering more services and we're seeing more business coming in (inaudible).

We'll communicate it to our customers and partners first and not this way.

Thank you very much.

You're welcome.

Thank you.

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

Please go ahead.

Hi, guys.

Most of my questions have been answered, but just wanted to talk about the new product pipeline.

Obviously, the UTM appliance has been doing very well.

Gil, should we think about any new products coming out over the next six to 18 months here?

I believe at the analyst day you talked about potentially looking at data loss prevention there and just wondering if we can get an update on that?

Yes.

We are not going to provide any specific update on upcoming products, but we are going to have more products coming forward.

We are going to execute on our data security strategy.

We're going to have more products in all areas, network security, end point security, and in the data security space.

And then your acquisition of NFR Security for intrusion prevention, I was wondering if you could just give us an update on that as far as the integration of that with FireWall-1 and VPN-1?

That's still a small part of the business [that's] actually tracking very well and we reported [we did] more deals and we slightly increased the percent of revenue or, and the dollar amount that it contributes.

And we are putting more and more in that technology in terms of incorporating both management and (inaudible) into our general gateways and I believe that somewhere next year we'll see more of these benefits showing up.

So, so far this business is a relatively small part of the business, but tracking very well.

Great.

Thanks, guys.

Thank you.

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

Please go ahead.

Hi.

Thanks for taking my question.

Gil, I was wondering as you look at Pointsec, specifically the integration efforts that you've been working on the last three quarters, would you say you're -- how far along do you think you are in terms of the integration throughout the worldwide geographies?

Is it 100% across all the geographies?

And then maybe could you talk a little bit about your plans in terms of just moving that division forward?

Thanks.

I think the integration is pretty much complete all over the world.

There is more benefit and more business which we can develop around it.

I think that right now we're still seeing a lot of business coming from the big named account businesses that Pointsec [has] and we want to add even more of that moving forward, but we still have a long way to go to get the channels to sell just small and medium-sized deals on an ongoing basis and in big quantities and that's probably worldwide, so these are the two big, I mean, moving parts.

But overall the sales force is well integrated, we operate as one group, we are managed under one umbrella, and I believe they are doing it quite well, especially in the U.S.

when Pointsec has in the past the biggest success and it continues moving forward.

I think that the next value that will be realized from this transaction is when the Check Point channel, the large Check Point channel will generate deal flow on a regular basis and we have made progress in this area.

We've seen Check Point customers, traditional Check Point customers that buy both network security, products and data security products in their quarterly ordering.

And that part of the integration has the biggest value and we're just at the beginning of seeing that value.

Great.

Thank you.

Thank you.

Your next question is coming from Katherine Egbert with Jefferies.

Please go ahead.

Hi.

I'm wondering outside of Pointsec, what else led to the strength in the large accounts?

Is that -- did you change quotas or somehow encourage your OEMs to, I'm sorry, your VARs to start selling larger deals and what other products might have contributed there?

I think a lot of the effort that we've done within the sales force have contributed to that business and mainly focus.

A big part of that focus is actually the Check Point named accounts people.

We do deals with (inaudible) VARs and we fulfill through the VARS, but many transactions that we are doing right now were driven by the Check Point-named account people and we've built that sales force through several years, but this year I think it was a, it shows more and more fruition in the way it's being managed and the way we get the benefit.

We did develop some programs which we are targeting the named accounts in a very particular means.

Support programs, system integration program in which we give them more and more value and customize what we do (inaudible) and these programs are actually showing a lot of benefit because they value that type of close relationship that they have with us and as a result of that, [they] buy not just more services, but [they] buy much more products to their environment.

So these are generally the things that we've done and so far it shows very good results.

Is there any risk that you'd disrupt that large account focus particularly for Pointsec as you roll it out to the channel?

We hope we don't.

We already fulfill most of the Pointsec business in the channel so we did make the most of the transition in terms of fulfillment (inaudible).

Over 80%.

Yes, how much?

Over 80%.

Over 80% of the Pointsec business is already fulfilled through the channel, so we avoid most of the theoretical competition or conflict that might occur with the channel.

But I'm differentiating here between fulfillment, involvement, and really the channel bringing up their deals that they generate with less involvement from Check Point.

Today in our business we have the entire spectrum.

We have from zero Check Point involvement to 90-some percent Check Point involvement, depending on the deal, depending on the customer, depending on geography and because we have no conflict with the channel, it works in a very nice, in a very good harmony with the channel.

Thanks.

Good quarter.

Thank you.

Your next question is coming from Daniel Ives with Friedman, Billings, Ramsey.

Please go ahead.

Hey, guys.

Good quarter.

Question.

Throughout the quarter, was there any discernible change with customer spending habits, maybe specifically within the financial institutions?

Is that a focus of some investors?

Not that we've seen.

The financial sector kept being a good client.

Some of our largest deals came from some of the world's largest financial institutions.

The financial institutions contribute somewhere in the mid-teens, mid 10%, between 10 to 20% of our transactions.

How much, exactly?

About 16%.

About 16% is coming from financial institutions and that's a good number and I think that this is healthy and we've (inaudible) to come.

Yes, let me just -- another question which is kind of asked before, but, I mean a few quarters ago, even last year, it was -- the core business was struggling and then you guys buy Pointsec and all the excitement.

Now Pointsec, okay, the net business is doing well on target, but the core business has really just started to take off.

Is there any specific thing (inaudible) all click at the same time relative to a year ago?

I mean, has it surprised you on the positive or this is kind of in line with where you thought the business would be a year ago when things weren't that good?

First, I think that we are tracking according to plans this year.

I don't know (inaudible) we are strong -- I'm personally a strong believer in our business and I think I'm saying it every time, but long-term I believe that our core business and network security is a very important area and should show good results.

By the way, just remember, every single quarter we show good results, the question is how much we will grow and how much growth they will show.

So I think this year generally speaking, we're tracking in the core network security business at plan or slightly ahead of plan in terms of my internal expectations.

So this is very good and very positive.

And I think what you've asked what initiatives have we done?

We've done many initiatives.

I'll repeat that.

I've already said it a few times.

We had UTM-1 appliances, we had strong focus on major accounts, we had the annuity programs that changed and expanded last year, we had the Smart Defense which is part of the annuity program and we have overall sales management and execution and product strategy.

And the good thing about that is I believe that all these things contributed and they all worked quite well.

So it's no single silver bullet but the combination of execution across the entire product.

If you look back at the analyst day presentation from the beginning of the year, it was all there.

And I think the rest was good execution, hard work, and also a reasonable market, which always never hurts and I think that we have really learned to execute and execute fast and take our ideas and great technology and innovation to market and convince our customers that -- and it starts from the large one goes all the way down the value chain that they're putting their security with Check Point is the right thing to do strategically for them as well as for us and I think it all shows.

It's a long-term thing.

And as Gil said before, it is no silver single bullet here and there's no magic here.

It's a lot of hard work and many new ideas and initiatives.

Keep it up.

Thanks.

Thank you.

Thank you.

Your next question is coming from Brian Freed with Morgan, Keegan.

Please go ahead.

Hey, guys.

Good quarter.

It sounds like you guys are pretty much wrapped up with the integration of Pointsec.

Do you see additional acquisition opportunities, areas where you could strengthen your portfolio to drive additional growth going forward and what's your kind of general acquisition strategy at this point?

What we said before, we're looking to expand our presence in the data security market.

We're looking at additional areas that could be complementary to what we sell and we'll do it when the time is right and we'll communicate when the time is right, as we've always done.

Thanks.

Thank you.

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

Please go ahead.

Good morning, everyone.

I know you guys are optimistic on Q4 data security and the contribution that you're expecting, but if Pointsec is unable to achieve the low end of your annual guidance, is Q4 at risk or do you think you have enough in the pipeline in the core business, which seems to be doing very well to kind of maybe compensate for that?

I think we've just activated our guidance for Q4 and we've (inaudible) said from what we have at the beginning of the year and what we have said a quarter ago so that says what we expect about the fourth quarter.

So overall we are -- we've just raised all our expectation in terms of revenue, earnings, earnings per share, so that means that we think at least, again, it's always a risk, but at least the data that we have in our hands right now points to a healthy Q4.

Thank you, guys.

Thank you.

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

Please go ahead.

Yes, hi, guys.

Thank you for the nice quarter.

Can you comment on the head count at the end of the September quarter and how do you expect to exit '07?

We have approximately 1900 employees all over the world with some modest growth from Q2 to Q3, we'll probably continue to add a few tenths towards the end of the year.

That's the run rate right now.

We're not jumping up and down, we're increasing consistently to support the increase in business.

I see.

And with the strong check during the quarter, what was the [forward] affect in the September quarter?

Thank you.

Obviously, a weak dollar, sort of remind you, the dollar was also weak compared to the European currency then we have about 300 people in Europe.

A weak dollar doesn't help.

We sell in dollars and we expense in many other currencies.

The impact was not big.

You've seen the numbers.

There were -- I think they speak for themselves.

So we're thankful that we don't need the currency excuse, we had a good quarter and the impact is not huge.

I see.

Thank you and keep up the good job.

Thank you.

Thank you.

Thank you.

At this time I would like to turn the floor back over to management for any closing comments.

All right.

Well, once again, I'd like to thank you all for your participation in our conference call today.

If you would like to speak to management or to Investor Relations following this call, please call our Investor Relations department, 650-628-2050.

Again, area code 650-628-2050 and we'll be happy to take your calls or return them.

Thank you very much and talk to you next time.

Thank you very much.

Thank you.

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

You may now disconnect.