Check Point Software Technologies Ltd (CHKP) 2007 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Check Point Software Technologies fourth quarter and 2007 year-end earnings results conference call.

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

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

(OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Mr.

Kip Meintzer.

Sir, you may begin your conference.

Good morning and good 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 an 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 fourth quarter and fiscal year 2007 results.

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

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

For your convenience, the fourth quarter results replay will be available through February 6.

If you would like to reach us after the call, please contact investor relations at +1-650-628-2050.

Now before we begin 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 for data security, expectations that continue to execute on a strategic initiative in the fourth quarter and beyond, belief that it will continue expanding and enhancing our product offerings as we continue delivering products utilizing our unified security architecture and integrated management platform.

Expectations for its financial performance and growth for the first quarter of 2008 and 2008 fiscal year and beyond.

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're 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 would like to turn the call over to Eyal Desheh, Executive Vice President and Chief Financial

Thank you very much, Kip.

Good morning and good afternoon everyone joining us on the call today.

I'm happy once again to begin the review of an excellent quarter and what turned out to be an exceptional year for Check Point.

We achieved record quarterly and fiscal year results from revenue non-GAAP net income and non-GAAP earnings per share perspective.

Our results both quarterly and for the full year came in at the high-end of our projection, as we continue to demonstrate solid growth across all our business segments.

We continue to see the adoption of our products from new and existing customers throughout the quarter and fiscal year as customers continue to embrace our unified security architecture and total security solutions.

Before I delve further into the numbers, let me remind you that our fourth quarter and fiscal year GAAP financial results include the following -- Equity-based compensation expenses pursuant to SFAS 123R; expenses related to acquisition of Protect Data and [Etifar], which we include in our 2007 results but were not included in previous years, as well as expenses related to the acquisition of Zone Lab, 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 website, represent 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 last quarter in the way we report results.

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

We now combine the software subscription line with the services line and it is now called software update maintenance and services.

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

We reclassified our 2006 results to conform with our current presentation.

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

Fourth quarter revenues were $206.7 million, an increase of 29% compared to $160.1 million in the fourth quarter of 2006 and a 12% sequential quarterly increase.

The network security business continued to drive growth, contributing a record of $182.5 million to revenues, an increase of 14% compared to the fourth quarter of 2006 and 12% sequential quarterly increase.

The data security business contributed $24.2 million in revenues during the fourth quarter, representing a 17% sequential quarterly increase.

We are happy with the overall performance of this business.

We're especially gratified with the 40% operating margin our data security business achieved in Q 4 this year.

In 2007, the total business generated by data security, including deferred revenue, was over $90 million and part of it will be recognized in 2008.

This amount also does not include $6 million in deferred revenue which we did not recognize due to purchase accounting treatment.

The data security generated very nice growth in America and the business in Europe improved considerably in Q4.

Year-end 2007 we transitioned out of the third party reselling business which we inherited with Pointsec.

This part of this business generated $17 million in 2006 and was reduced to $6 million in 2007 for the Pointsec.

We are starting 2008 with a good pipeline of data security deals and believe that the data security parts will continue to grow faster than the rest of our business.

As part of our expanded strategy, we will combine our data security with our endpoint security business.

This combination will result in new product offering and we will be looking at the combined results from Q1, 2008.

GAAP net income for the fourth quarter of 2007 was $87.9 million, an increase of 11% compared to $79.5 million in the fourth quarter of 2006 and 15% sequential quarterly increase.

GAAP net income in the fourth quarter of 2007 includes acquisition related charges of $10.3 million and equity-based compensation expenses of $8.8 million.

Net of taxes these charges total $14.6 million.

Non-GAAP net income was a record high of $102.5 million, an increase of 13% compared to the fourth quarter of 2006 and an 11% sequential quarterly increase.

Total GAAP operating expenses for the quarter were $118 million.

Operating expenses on a non-GAAP basis was $99 million compared to $69 million in the fourth quarter last year.

The increase in operating expenses is due mainly to the additional Pointsec, an increase in cost of goods resulting from the increase in appliances sales.

Our non-GAAP operating margin was 52% consistent with the third quarter of 2007.

Our effective GAAP and non-GAAP income tax rate for the fourth quarter was approximately 14% and 15% respectively.

GAAP earnings per diluted share for the fourth quarter of 2007 were $0.39, an increase of 11% compared to $0.35 last year.

This GAAP earning include 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 fourth quarter of 2007 were $0.46 compared to $0.40 in the fourth quarter last year, an increase of 15%.

Deferred revenue this quarter were $274 million, an increase of $69.5 million or 34% over December 31, 2006 and an increase of $47 million from the end of Q3.

For the fourth quarter, our DSO, day sales outstanding, were 72 days compared to 67 days in the third quarter of 2007.

The increase is first and foremost a reflection of the strong Q4 booking, which was also back end loaded.

An exceptional number of large deal which set to close at the end of the quarter contributed to the strong quarter but also to the increase in DSO.

We generated cash flow from operation of $91 million, an increase of 10% compared to Q4 last year and we ended the quarter with over $1.2 billion in cash and investments.

During the quarter we purchased approximately 2.8 million shares for a total cost of $61.9 million as part of our share repurchase program.

Moving forward, we have approximately $73 million remaining from the $1.2 billion cumulative board authorized stock repurchase program.

Now let's look at our 2007 fiscal year highlights.

For the year ended December 31, 2007 revenues were $731 million, an increase of 27% compared to $575 million for the year ended December 31, 2006.

As a reminder, our original forecast for the year stood at $690 million to $720 million.

Network security accounted for a record $648 million in revenues, representing 13% increase over 2006.

Data security contributed $83 million to revenues for the year.

GAAP net income for 2007 was $281.1 million compared to $278 million for 2006.

Net income for 2007 include equity-based compensation expenses in the amount of $34.1 million, acquisition related expenses of $57 million, including e-process R&D in the amount of $17 million.

Net of taxes, these charges total $77.7 million.

Non-GAAP net income, excluding acquisition related and equity-based compensation expenses, was $358.7 million, an increase of 12% compared to $320.3 million for the year ended 2006.

Our effective GAAP and non-GAAP income tax rate for 2007 fiscal year was approximately 15%.

GAAP earning per diluted share for 2007 were $1.25, an increase of 7% compared to $1.17 last year.

GAAP earning per share includes equity-based compensation of $0.15 and acquisition related charges of $0.25, which includes e-process R&D of $0.07.

Net of taxes these charges total $0.34.

Non-GAAP earning per share for 2007, excluding acquisition related and equity-based compensation charges, was $1.59, an increase of 18% compared to $1.35 for the year ended 2006.

Now, I would like to turn the call over to Jerry for some color on the quarter.

Jerry, please go ahead.

Thank you, Eyal, and hello, everyone.

I would like to begin today by providing you with revenue and deal metrics for the fourth quarter and physical year 2007 and then address our evolving business strategy.

During the fourth quarter, our geographical revenue distribution was consistent with prior years but was especially strong in the Europe, Middle East and Africa region which grew in excess of 34% this year.

Specifically, we had 43% of revenue coming from the Americas, Europe, Middle East and Africa contributed 46% and the Asia Pacific and Japan region contributed the remaining 11% of revenues for the quarter.

For the year the geographical revenue distribution was 45% of revenue coming from the Americas, Europe, Middle East and Africa contributing 44% and the Asia Pacific and Japan region contributed the remaining 11% of revenue for the year.

During the quarter we continued to see a number of larger deals coming from network security and data security.

As a result, transactions greater than $50,000 accounted for 45% of total order value and we had 19 customers that each had transactions with a value of $1 million or greater.

Now, I would like to turn your attention to our expanding business strategy, which has been one of the key drivers of our network security growth over the past several quarters and hopefully will provide you with some clarity over how appliances fit into our overall strategy and business model.

First off, we began offering our software bundled as a UTM-1 appliance earlier this year after looking at the opportunity for some time.

One of the reasons we implemented the expended appliance strategy is that we realized there was a gap between what our traditional platform partners were bringing to market and the total market opportunity.

We also believe that it would provide us with a strategic growth opportunity which is supported by our most recent results.

Essentially, we put ourselves in the unique and advantageous position with our ability to provide either a software or hardware solution to best fit the customers' needs.

For example, with the introduction of our appliances we are now able to provide customers with a single vendor solution that enables us to compete head-to-head with our competitors where customers are looking for a single vendor solution.

From a business model standpoint, appliances should provide a long-term growth driver to our top-line and bottom-line results.

Appliances also contributed over the long-term because of their three to five year replacement cycle which provides a recurring revenue opportunity.

With this dual strategy, we believe we are uniquely positioned to provide customers with the best solution, whether it is a software sale on a partner appliance, an open server or an appliance from Check Point.

In addition, with our acquisition of Pointsec, we now provide another layer of security for our customers, data security.

This has enabled us to create a very significant endpoint solution for our customers as we integrate the various technologies into a single agent.

This has the potential to be a strong and compelling differentiator in meeting the needs of the market.

We were also able to better meet the performance needs of our high-end customers with the announcement of our CoreXL technology.

And just this past month, we enhanced our unified threat management solutions by adding messaging security capability to our UTM-1 appliance family.

In summary, we believe that we have significantly improved our positioning in an absolute sense and definitely relative to our competitors.

This will continue to be our focus in executing our strategy, providing the best total security solutions to the market.

We will accomplish this by leveraging our 15 years of technology in innovation leadership and delivering the best security in a unified gateway, a single endpoint which are all managed by a single management console.

These are compelling capabilities that could only be provided by Check Point.

Finally, I want to echo Eyal and say we are very pleased with the results for this quarter and our success in 2007.

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

Thank you, Jerry.

And thank all of you for joining us today.

As you just heard from Eyal and Jerry, the fourth quarter and fiscal year 2007 turned out exceptionally well.

From a financial perspective we posted record quarterly and annual results across the board, which continues to underscore the success of our pure focus on security and the quality of our product offering.

During the year we have made a successful entrance into the data security space with the Pointsec acquisition, at which point we have combined the organization and the channel and we are ready to move to the next phase and introduce our integrated endpoint solution, which we expect will be one of the strongest and most comprehensive in the industry.

In addition, our network security product had a very good year and we realized a success across the marketplace, but especially with our mid-range and high-end customers.

As we move forward, we believe our unified gateway and endpoint solution, combined with our single console for security management, present a compelling value proposition for customers looking for increased security with ease of use and simplified deployment.

We believe this will lead them to consolidate more of their security infrastructure with us.

As we look into 2008 our sales force is motivated and enthusiastic about the opportunity ahead of us.

However, one must also take into consideration the uncertainty surrounding the global economy.

With that I would like to share our current forecast for the year.

For the first quarter we expect revenues to be in the range of the $184 million to $193 million.

GAAP EPS for the first quarter is expected to be between $0.32 to $0.35 and non-GAAP EPS is expected to be in the range of $0.39 to $042.

For the entire year, for the year 2008, we expect revenues in the range of $780 million to $820 million, GAAP EPS in the range of $1.43 to $1.53, and finally, non-GAAP EPS in the range of $1.71 to $1.81.

With that I would like to open the call for your questions.

Thank you very much.

(OPERATOR INSTRUCTIONS) Your first question is coming from Sterling Auty of JPMorgan.

In the data security area, if you were to normalize for the third party revenue and the loss of deferred revenue, what would the growth in that area have been in 2007 and what should we be thinking about the growth rates in data security in '08 and beyond?

I will take the first one.

On normalizing, if we don't normalize we would have generated a gross of about 30% to 35% over the results of last year.

It is never apples to apple.

At the Pointsec prior different accounting treatment have different revenue recognition tools.

Our GAAP is a little more conservative than what they had.

I would say that about 30% to 35% growth, maybe a little more for a normalized the business.

Future growth rate I will refer to Gil.

For the future we do not break our expectations or plans according to individual product, but I still expect that the growth rate from the data security product will be much higher than the growth rate of the rest of the business, even though at this point as you can see we have healthy growth rate on both sides.

I think that's the very good news for the entire business.

And then my follow up question would be macro is on everybody's minds.

Can you just give us your thoughts as to how Check Point is positioned given the current macro environment and perhaps if we see further slow down.

You know that I'm in (inaudible), but I specialize in micro not in macro.

But having said that, we all read the same paper, we read the same analyst report, it tends to be confusing.

I think nobody will take a risk in predicting how the year will turn out macro wise.

I think the unfortunate part is that we are at Check Point, we are equipped with more tools in our tool box than any year before and hopefully the market share that we added in 2007, the pipeline that we are seeing in 2008 will be able to compensate for any foreseeable slow down in the economy.

And it is a complex question because right now we are not seeing much of it but it doesn't mean it doesn't exist.

Thank you.

You're welcome.

Your next question is coming from [Jonathan Darrows] of UBS.

Hi, guys.

Can you give us an estimate of what percentage appliances made up of working securities now and where you see that going?

Going forward?

In the quarter and then maybe.

The assumption is similar growth rate for product revenue and the services.

Can you just talk a little bit about -- ?

The mix will remain similar, more or less the same mix.

Talk a little bit about the Pointsec market and have you seen ASPs, some pressure in ASPs or is it a pipeline issue that caused '07 to kind of miss your original expectations?

Can you repeat that really quick?

You were breaking up a little, Jonathan, you need to are repeat that.

In the Pointsec business, was it a ASP issue that caused the sales to be lower or was it more of a pipeline, deals getting frozen due to (inaudible)?

I think we didn't see any pressure on the ASP that we haven't seen before.

It is a competitive market, but we actually saw nice deals and very reasonable ASPs.

I think overall what we did in Pointsec during the year is transition them from a standalone, start-up like environment to working with the Check Point channel.

And I think we have seen a lot of success on that.

The best evidence is what we have seen in Europe.

In Europe in Q4 we have seen the hugh jump in sales in Pointsec, which means that the new Check Point sales force and channel have helped create a healthy pipeline and moving to the Check Point structure.

Beyond that, I think, again, we have a lot of potential ahead of us.

We will continue with that.

Okay.

Thank you.

Thank you.

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

Hi, good morning.

Gil, I was wondering if you could kind of talk about, or Jerry, talk about the data security endpoint strategy here as you are bringing those products into the single agent.

As you are going to market with that strategy, how are you kind of leading?

Are you leading with historical Pointsec stuff, then trying to get them to turn on the old Zone Lab's AV and personal firewall?

How should we think about your strategy moving into that endpoint and how do you plan to lead with it?

I don't want to get too much into details of that, but I'll give you the highlights.

I think our entry into this market can come from two or three different angle, one is the data security.

We are unique and we are the leaders in data security.

So as people deploy our data security they can utilize additional features that we have.

Another entry point, which we are also leading in this market, is the remote access in VPN.

So again customers that are using our remote access have all the leverage and the ability -- and we have the ability to do cross selling and sell more functionality like data security.

And finally, there's the FireWall Knock, what we call program advisor security for the endpoint which we are also leading in the marketplace.

And again each one of these three can lead us to sell the other two or three or maybe even more functionalities that we will have in our endpoint security.

What we are not going to do this time, and not to focus in the beginning, we are not trying to be a competitor in the AV space.

We might have the functionality and it might be an important element but we are not going to try and tackle the AV vendors with what I think is a commoditized market.

And I think what we were going to lead is provide the much higher value in terms of the security functionality that I just described and in terms of the ability to manage that kind of environment and especially the link between the network side and the endpoint side.

Great.

Maybe as just a quick follow up for Eyal, when you look at the third party business which has been historically you are getting out of, you mentioned that there were $6 million of it still in '07.

Should we expect that to go to zero throughout 2008 or what's kind of the outlook for that third party business.

I don't know if it will go to zero, but with $6 million in '07, it is really an insignificant number anymore.

By the way, one of the reason of the improved profitability of the Pointsec business is that transition out of that.

Obviously, third party is a non-profitable business, not in terms of (inaudible) that we have.

So, it is going to wind down slowly, it is nothing, it is not a one timer, probably disappear over a few years.

Great.

Thank nice quarter.

Thanks.

Thank you.

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

Hi, guys.

Just wondering if you could comment on your appliance business end.

Last quarter you said that it was 24% of product sales.

Wondering what it was in Q4.

But also just the strength in deferred revenue, just curious if any of the appliance success is also driving that with the add-on subscription sales.

In Q4, appliances were about 25% of product sales.

And as you have seen, product sale has grown considerably in Q4 compared to Q3 and compared to last year.

This is -- it is only 5% of all our products, including the Pointsec and everything, not just from the network security products.

So it is tracking very well.

It is increasing very, very nicely.

We ar very happy with that.

What was the second part of the question?

I'll maybe answer the second one.

If it is also driving some of the deferred revenue, then the answer is that overall, yes, it does especially if you look at the models of total security that we launched at the end of the year, which includes three year packages and especially because of the accounting rules these days, that means that every addition to the product and every bigger and bigger portion of the product revenue are the sale.

Now the product revenue actually goes into the deferred revenues and to recognition over one to three years.

I don't think it has a huge effect in Q4 yet, but I think what you will see moving forward that our new products are actually going to have a even bigger impact on deferred revenues and product revenues.

Absolutely.

We are selling our UTM product with a full set of UTM functionalities and add-ons that customers pay for.

While at this point it is still on a low volume, it is increasing and the penetration and the coverage rate is increasing.

It is going to play a much bigger role in 2008 as we sell more UTM and also the coverage and the number of customers that will buy these add-ons is increasing all the time.

And of course this is service.

So it will add -- we will add it at the beginning to deferred revenue that will be amortized over the lifetime of the agreement on the services.

And also can you just give us a sense for what appliances were for the full year as a percentage of product revenue.

Yes, about 21%.

Perfect.

Do you know what that was in 2006?

If I recall it was about 12% but don't catch me on that.

Perfect.

Thanks, guys.

Thank you.

Thank you.

Your next question is coming from John Walsh of Citi.

Just to go back to the data security side of things.

If you looked at the actual $83 million that you did versus the 95 to 105 original estimate, what part of that delta, if any, was due to accounting assumptions that you made at the beginning versus what actually you were able to recognize with the accounting roles?

Hard to estimate, between $5 million to $10 million, I guess.

Okay.

So $5 million to $10 million of the delta was the assumption going in versus what you were able to do.

Yes.

Okay.

Of the three that you just talking about the three year, one to three year subscriptions that follow on or add-ons for the appliance side, how much of that is billed up front when you do the multi-year that would hit deferred revenue?

Right now it is a very small part of it.

It is not a big thing.

We expect this to grow in the future as we sell more of these three year bundle.

Let's not forget we just launched this in the fourth quarter and the pipeline only building now.

Okay.

And then just last question, any update on the CFO search?

Thanks.

I will refer to Gil on that.

No and we will have -- when we'll have an announcement we will be happy to share it with you.

Any estimate on the time frame.

Not at this point.

We have some good candidates but it will take us some time.

I can say that I will be, this is Eyal, I will be discussing Q1 results with all of you guys in the middle of April.

I'm not leaving any time soon.

Okay.

Great.

Thanks.

Thank you.

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

Good morning, everyone.

Eyal, they are finding you hard to replace.

Quick question on the Americas.

The sequential growth there was weaker than (inaudible) have historically seen from you.

So I am just wondering if you could comment specifically on the spending environment in the U.S.

and in particular everything any impact of customers maybe hold back on your project deployments just given the economic environment?

I don't -- we had good growth in the Americas.

EMEA was really strong at 34.

I think we said America is doing 24%.

Sure.

I was just looking at it because I think-- .

On a relative basis, compared to the market and competitors, whatever, I think we just have very, very good growth rate there, they just didn't keep up with EMEA.

But they did very well.

And no, there wasn't -- I mean we had a lot of major wins.

I talked about 19 transactions greater than $1 million.

We had some that were way over $1 million with significant wins on the competitive, both data security, network security, very large institutions.

We are doing -- I think it was an exceptional quarter.

I think sales organization on a goal basis did a very good job.

We are well positioned.

I am excited about some of the stuff we have done from a product stand point and what we are going to be doing in 2008.

Our competitive positioning has just really,really improved and is continuing to get stronger and we just need to keep on focusing.

All right.

Maybe one more thing I would like to add, that in certain segments, purchasing also turned out to be global in many sectors.

For example if I take the financial sector, many of our and the largest customers that we have on the financial sectors are purchasing on the global basis and I think it is very hard to contribute their contribution to one region or another.

Actually, many of the large financial institutions that are large and global and are known in the U.S.

are actually making their purchases out of Europe.

Got it.

One more thing maybe, Sarah, the sequential growth also depends on the base.

You look at Q3, America was very strong in the third quarter.

So the base was very high there and I think the delivery of the fourth quarter was awesome, was exceptional and also throughout the year.

Got it.

Just a second question for you, Eyal, on the cash flow growth.

The cash flow growth came in below versus a net income growth.

What's the drag there and if we look into '08, should we expect cash flow growth to come in line with net income growth?

The correlation between cash flow and net income is never one-to-one on a quarterly basis, not even on an annual basis.

You will see that reverse next quarter as we collect all the booking of Q4 in Q1.

And usually what you see is Q1 is the biggest cash flow quarter for the year for us and Q4 on the back of the Q3 booking is the slow one.

Let me, just to summarize what Eyal say, I think.

First we will make up for [vet] cash flow in Q1 because that where the collection happen.

One more thing that two more events that did happen in '06 and '07 is that we moved to a new headquarter and for the first time we have relatively large capital expenditure during the year.

Again, it is not -- comparing to our balance sheet it is not very significant, but it is still the capital expense that we made, approximately $50 million is what we used to spend for five years on capital expenditures.

Got it.

That will come back to more normalized levels now that you have made that shift.

Yes.

Okay, great.

Thanks a lot.

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

You talked about success in the high-end of the market, can you perhaps touch on what you are seeing out there competitively, how your new appliance strategy is helping you take some share back in the market.

And of the large deals, were those primarily into the installed base or did you have some rip in replacements as well?

Thank you.

Yes, it was an exciting time.

We did both.

Some are with some customers but in many cases and I am trying to think of most of the large ones, Israel, we expanded our base but we also displaced competitors.

Some are really large corporations that have multiple vendors across.

The UTM was going to the mid-market branches but in our high-end solutions, the integrated solution we have there, was very successful this quarter, very large accounts with big numbers and they were all competitive situations.

And yes, I bet in -- I'd have to guess, but a number of them were replacing installed competitors.

Thank you.

Thank you.

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

Hi, guys, how are you?

Fine.

Thanks.

I was hopeful you could give us a sense in terms of expected growth profile of network security versus data security in '08.

How should we think of the relative growth profiles.

Again, I think that we are not breaking these estimates for separate product lines but right now on the net basis, data security is faster than network security.

But the good news is that we have seen last year and we hope to see next year, healthy growth in both.

So it is not that one need to compensate for the other.

Okay.

Can you guys just quantify your exposure to the financial services vertical?

I can take that.

Our all-time exposure to financial services is around 16%.

This is the analysis of our install base.

That was the number more or less during 2007 was between 15% to 20% depending on the quarter and the average is around 16%.

About half of that is U.S.

and half of that is the rest of the world.

Okay.

And can you guys give us some insight in terms of stock buyback, 73 million left on the authorization, you guys continue to accumulate cash on a quarterly basis and the stock is near its 52 week low, why not get more aggressive on the stock buyback?

Why not?

We might say -- (multiple speakers).

Nobody says the opposite.

Well, are there any scenarios, Gil, where you would consider selling the company?

Personally, I think that Check Point has a lot of potential to be standalone leader in the pure security space and I think the world does need a company that's purely focused on security.

That's been our strategy for 15 years and I hope it will remain so.

Maybe I can add something, not as a major shareholder.

If you look why companies are being sold, always a few parameters effect that.

I think that none of that exists in the case of Check Point.

Okay.

Thanks, guys.

Thank you.

Your next question is coming from Michael Turits of Raymond James.

I just wanted to get more detail on John Walsh's question.

Can you just bridge the gap between the original $100 million guidance for data security and the $83 million, how much of that was from greater than expected accounting changes in terms of a write-down, how much of it was from the loss of the third party vendor and how much of it was just from less business?

We can try to put it in order.

About $5 million to $10 million has to do with accounting, with accounting treatment, and again, I don't want to give an exact number because I don't have an exact number analysis.

About $11 million was a reduction of the third party business, which we did not account for early on.

But when we understood the business and the level of contribution and the focus is on selling data security products and not third party reselling products.

So between these two, it could be around $20 million.

Okay.

So basically all of it was these two items.

In terms of the actual amount of business x these two, it was what you expected?

Yes.

Roughly.

Roughly.

Again, you could say if you look at it from one side, it is more than what I've said at the beginning of the year, at the very high-end.

If you look at it from a different perspective it is in the middle to the lower range of the year.

But I think what we are pleased with is the business is progressing and it is clearly in line with what we expected to happen.

That's the most important part.

And if you could just give me a follow up on -- just a update on two items.

One is just on the CES program, CES services program, what do you think the penetration of that is in various international markets and anything you can say to update us on consumer, which we haven't talked about in a while.

The CES program is fully implemented in the international market outside of the U.S.

by now.

I think towards the case for the entire 2007.

Actually almost from the end of '06 we had full coverage.

From the end of '06 we had full coverage outside the U.S.

In terms of the consumer market, I think this year our consumer market didn't do that well, especially because it took us some months to come up with a VISTA version of our Zone Alarm product due to changes in the API with -- for VISTA.

But I think we fixed up quite nicely from the middle of the year.

Okay.

Thanks very much, guys.

Your next question is coming from Walter Pritchard of Cowen.

Hi, thanks.

Most of my questions have been answered.

Eyal, just a couple of financial questions.

The G&A expense looked like it ticked up quite a bit sequentially.

Was there any particular driver around that number this quarter.

Nothing special.

Okay.

And then just around -- .

Although probably a couple of legal bills, they like to do it at the end of the year.

Got it..

And then just secondly, just so we are all in the same page around tax rate year, what are you assuming in terms of your tax rate in '08.

Probably a little higher than what you've seen this year.

I know I am telling you that every year, but probably go up to around 17%.

Okay.

And then just, Gil, around the endpoint strategy it seems like while you mentioned the antivirus is a commodity space, the endpoint space in general seems fairly crowded and fairly competitive.

I am wondering, it sounds like you are not willing to talk about the whole strategy but maybe you can just give us a glimpse in terms of beyond the data security point and the VPN client, which seems to be somewhat of a separate technology today, what your differentiation would be to the mass market outside of your customers that have your VPN client?

Personally, I think we believe that every customer needs basic security on their endpoint.

That's, by the way, both the size of the data encryption and controlling the ports on the electric cord on the desk top computers.

That's one need that people need.

I think that people also need to protect every desk top and control which programs can run and which programs cannot because the network invest program advisor technology that we have is fairly unique from Check Point.

For mobile users, again everybody needs the remote access capabilities and the personal firewall capabilities and the VPN that's included with that.

So I think these are relatively universal needs.

Today when you look at customers, if they need to implement three, four, five different security agents on every desk top, on every lap top computer, that's extremely expensive.

The purchase cost of this product is the small part, but updating, maintaining, finding all the collisions between all the agents on every endpoint, that's the part what I think is very hard part for the IT department.

By the way for that reason, some IT departments don't have all the security measures.

And I think that's one of the unique things that we will be able to offer to the market place, combining many of these functionalities into a single agent with single policy with the ability to know exactly what's going on and with very easy updates, and a much, much lower TCO cost.

And I think that would be an easy unique value proposition from Check Point.

As far as I know no other company today in the marketplace has it.

I don't think that many people are close to have it or that they even have its vision.

Actually if you look at many of the companies in those spaces they're shifting to other areas.

Definitely none of them have anything to do with the networking.

And maybe finally, which I forgot to mention, is the link between these technologies and the networking is the ability for the network to identify what kind of security measures are used on the endpoint.

Again, they're facts that we have, that we supply both the gateway technology and both the endpoint technology is a very big advantage over there.

So I think we will come up with a nice value proposition.

The good news is that for us it is primarily upside.

We don't have any -- we don't have much exposure to that market from a down side perspective and I think it is a multi-year opportunity that we will be focusing on in 2008 and hopefully we will see some results in '08, '09, and '10.

Just one follow up, should we expect, Gil, that you need to -- that's mostly an organic strategy or do you need to do anything meaningful on the acquisition side to fulfil your (inaudible) area.

For right now it is primarily organic because we did make several large acquisition in that space from our entering to that space four years ago with the acquisition of Zone Labs, through the acquisition of Pointsec, which is again around data security but at the endpoint.

I am not excluding the option of having additional acquisition but clearly we have made an entry through acquisition to all space.

And we had our client, VPN client software and personal firewall software for many years.

So it is a good combination.

Your next question is coming from Katherine Egbert of Jefferies.

Hi, good morning.

A couple of questions on the large deals.

What's your assumption on the number of large deals for Q1 and also how many of the large deals in Q4 were data security only?

It depends on what you call a large deal.

I think if I remember correctly we had four over $1 million data security deals in the fourth quarter.

And for Q1 and entire 2008, this is not a way we plan.

We know the pipeline, the large transaction definitely have higher visibility, so they're well, and longer sale cycles, so they're very well known and followed from the first day of the opportunity.

But it is not something that we communicate and/or in our metrics on a quarterly basis.

Okay.

Then can you just give any indication yet -- is it meaningful to talk about the penetration of the data security technology into your installed base as a percentage?

I think it is still very early and it is still very low in our install base.

The good indications that we are getting is that there's a lot of cross selling and some from our largest win, the credibility that we got on the metric security really helped us.

In the endpoint security, I can mention one deal for example that was very large deal that early on was won by a competitor, the competitor like most of these deals for (inaudible), they didn't perform very well.

The fact that we have credibility in the network security side led the customer to us, ask to help, and then we displaced the competitor on the deal that was one of the largest deals we had this year.

Our sales force was very, very pleased to see that they see the leverage and the fact that Check Point is -- there's a positive awareness that our customers have to our technology.

I wanted to add one thing here in order to understand the potential of data security.

It is not so much into large deals, they are -- large deal are very nice, we are very happy when we win them and they have a very high profile.

But there are only so many of them.

The big piece is in the tens of thousands of companies with $100,000, $200,000, $300,000 transactions which we are getting and we are beginning to see also to our channel and the channel of the adoption of the product by the channel.

That's the key for success and the nice thing about the second half 2007, especially in Q4, is that we are beginning to see a large number, a larger number of transaction of mid-size and that is definitely one of the keys for growth.

Maybe then just a follow up on that last point, Eyal.

What's the average transaction size for data security versus the network security.

Sorry, again.

Average transaction size.

We don't communicate average deal size or average transaction size.

Data security is bigger than network security, network security includes a lot of renewals of services and subscription, a lot of smaller deal for much smaller customers because we are all over the place from the very small, small business all the way to the largest enterprises in network security.

In the data security the business is still concentrated on the larger accounts and it is going slowly, slowly down market so the average is larger but we don't have numbers to communicate.

Okay.

Fair enough.

Thanks.

Thank you.

Your next question is coming from Daniel Ives of Friedman.

Hi, guys, great quarter.

My question has been answered.

I just want to clarify, I know some people are asking questions to support their armageddon thesis, but -- so you guys beat on the quarter, you give midpoint above for 1Q in 2008 which assume conservatism and the UTM business to core business grew 14% year-over-year.

Is that true?

Yes.

Just wanted to make sure I was looking at the same report.

Thanks, guys.

Congrats.

I want to -- this is not a question that we are getting here, but I want to clarify something about, about our, the mix of our deferred revenues and the length of our deferred revenues.

Most of our deferred revenues, more than 95% of our deferred revenues are one-year deals.

The percentage of over one-year deals and they go up to three is less than 5% of the total deferred.

That's similar to historical rates.

It haven't changed dramatically with the addition of our total security and our UTM-1 three-year bundle.

This right now is a very, very small component of our total deferred.

The entire growth in deferred comes mostly from regular bread and butter one-year deals.

We can take the next one.

Thank you.

Your next question is coming from Manish Hemrajani of Oppenheimer.

Hi, guys.

Good quarter.

Thank you.

That was a question or a statement?

A statement.

[ LAUGHTER ] How do you see ASP's trending in the quarter?

Hopefully up.

I think if you look at all the product mix that we have in general, I think what we are building into our model is giving to the customer more bundles and more value which in terms will increase the ASP on every deal.

Within UTMs, are you seeing more customers coming in the high end of the appliance range or at the low end?

In terms of mix, what do you see there?

Right now the short-term focus is on the higher end but I think we want to expand these lines on both the high end and the low end.

Okay.

Got it.

That's all I have.

Thank you.

Thank you.

You're welcome.

Thank you.

Your next question is coming from -- .

Last question, Cheryl, please.

We don't want to miss the open of the market.

Your last question is coming from Rob Owens of Pacific Crest Securities.

Good morning, guys.

Could you give just a little more granularity in deferred relative to your appliances.

Do appliances that are sitting in the channel, is that booked into deferred, number one, and is there an expectation for deferred revenue in the first quarter.

Thanks.

First, appliances are right now the contribution of appliances to our deferred revenue, the services that we sale on top of that, is higher than on a regular software sales but not substantially higher.

So yes, it is contributing and the attached rate of services on appliance is higher than on a regular because the, because people usually buy a piece of hardware together with the service package.

So we get the services on almost most of them with a very high attach rate.

Yes, in terms of install base, don't forget most of our deferred revenue is created by renewal of our large install base and the appliances are fairly new, so the proportion is still low.

As to deferred revenues for next quarter, you know we don't guide that, but after the very, very big jump that we have seen in Q4, Q1 is always slower in growth.

In Q1 last year we had the acquisitions as part of the growth and deferred came from adding the Pointsec deferred, or what was left of it after the accounting treatment.

So in this Q1 deferred revenue is expected to grow moderately, no specific numbers of that as of this -- .

But one clarification toward (inaudible), deferred revenue does not include channel inventory and as much as I know we don't have much channel inventories anyway.

So appliances that are effectively sitting in the channel, are those in your inventory balance or how do those -- ?

There's not much appliances sitting in the channels.

We don't do that.

We don't have a channel inventory model.

Most, most of the deals are sell-through and channel or order, channel orders that the products when they have a customer to sale to, the majority of it.

Okay.

Thanks.

Thank you.

All right.

Well, let me summarize the call.

Once again, we would like to thank all of you for your participation today.

If you would like to speak to management or investor relations following this call, we are all in the California office in the Redwood City Office, so you can please call our investor relations department at 650-628-2050.

Again, 650-628-2050.

We will be happy to take your call.

We look forward to talk to all of you in the middle of April with the release of the first quarter results.

Thank you very much.

Thank you everyone.

Thank you.

This concludes today's Check Point Software Technologies conference call.

You may now disconnect.