Check Point Software Technologies Ltd (CHKP) 2008 Q2 法說會逐字稿

Good morning.

My name is Sheree.

I'll be your conference operator today.

At this time, I'd like to welcome everyone to the Check Point second quarter earnings conference call.

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

After the speaker's remarks there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you.

I'll now turn the call over to Mr.

Meintzer, Director of Investor Relations.

Go ahead, sir.

Welcome 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, Jerry Ungerman, Vice Chairman, and Tal Payne, Chief Financial Officer.

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

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

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

For your convenience, the second quarter results replay will be available through August 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 may include expectations for our total security strategy, expectations that will continue to execute on its strategic initiative and the third quarter and beyond.

Believe that it will continue expanding and enhancing product offerings and expectations for its financial performance and growth for the third quarter and fiscal year 2008.

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

Because these statements pertain to future events, they're subject to various risks and uncertainties and actual results could differ materially from Check Points 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 year ended December 31st, 2007, which is on file with the Securities and Exchange Commission.

Check Point assumes no obligation to update its forward-looking statements.

Now, it's my pleasure to turn the call over to Tal Payne, Check Points Chief Financial Officer.

Thank you, Kip.

I'd like to welcome everyone and thank you for joining us today.

I've been on board since mid-June and had a chance to spend some time with management and my team.

I am very impressed with the quarter as well as the rest of the organization.

I think it goes without saying that I'm very pleased to be part of such a great Company.

I look forward to spending time with those of you on the call and upcoming meetings and conferences.

Now, I'd like to share with you the financial results for another great quarter for Check Point.

Our quarterly results came in at the high end of our projections, as we continue to execute on our strategy and deliver results of our plans for the last six quarters in a row.

Before I will provide you an overview of the financial highlights for the quarter, I'd like to remind you our second quarter GAAP financial results include equity-based compensation expenses according to FAS 123R and expenses related to our acquisition.

Non-GAAP information is presented excluding these items.

In our press release, which has been posted on our website, we presented GAAP and non-GAAP results along with reconciliations which highlight these data.

Now, let me share with you the financial highs of the second quarter of 2008.

Revenues for the second quarter were $199.6 million, an increase of 13% compared to the second quarter of 2007 and 4% sequential increase over the first quarter of 2008.

We continued to see strength across the business with Check Point branded appliance leaving its organic growth.

Geographically, revenue growth was less by our enterprise business in the US with increased demand in Asia specific.

The distribution of the quarter is 44% of revenues coming from the Americas, Europe, Middle East and Africa contributed 44% and Asia, Pacific Japan region contributed the remaining 12% of the quarter revenue.

Our product and license revenues were $85 million with gross of 16% over the second quarter of last year.

We believe these results underscore the success of many initiatives we put in over recent quarters, including the introduction of our new high-end Power-1 Security appliance and extension of the UTM-1 product line.

We exceeded our earnings per share plans for the second quarter of 2008 and achieved GAAP EPS of $0.36 and non-GAAP EPS of $0.43 at the high end of our guidance.

We also maintained very high non-GAAP operating margins at 51% consistent with the first quarter of 2008 and the fiscal year of 2007.

We achieved that despite the weakness of the dollar against different currencies around the world.

To reason explanation about the effect on the dollar of our results.

Substantially all of our revenues are dollar denominated, while approximately half of our expenses are non-dollar currencies.

Mainly the Euro and Israeli Shekel.

The devaluation of the dollar increases our operating financial and tax expenses.

This quarter the dollar devaluation increased our expenses compared to our plan by approximately $6 million of presenting $0.03 earnings per share.

Our effective GAAP and non-GAAP income tax rates for the second quarter were approximately 18% caused by the continued devaluation of the dollar and valuation of the tax provisions.

The third revenues this quarter with $279.2 million, an increase of $43 million or 18% over June 30, 2007.

Also, unlike June 30, 2006 and 2007 where the revenues decreased sequentially in line with traditional seasonality, this quarter we experienced a sequential increase of approximately $1 million over last quarter, as a result of strong subscriptions and maintenance in our new security services, such as the proper security update services that continued to increase.

For the second quarter, our DSO was 71 days compared to 69 days in the first quarter of 2008.

As the number of large deals increase and our business remains back-end loaded.

In the second quarter, we generated cash flow from operations of $82.6 million.

Our cash investment balances at the end of the quarter were over $1.34 billion.

During the quarter we purchased approximately 2.1 million shares for $50 million.

We have approximately $360 million remaining in our current active share repurchase program.

In addition, we made the last payment for the acquisition of Pointsec in the amount of $9 million.

So overall, I'm glad to report good results in my first quarter as a CFO for Check Point.

I am looking forward to your support.

Now, I'd like to turn the call over to Jerry.

Thank you, Tal.

Good morning to all of you joining us today.

I'm very pleased to say the second quarter continued to trend in the last five quarters.

One of the key drivers of the success continues to be that our customers are embracing our total security strategy of delivering a comprehensive suite of security products for the enterprise.

We have continued to realize success across our product lines as customers look to reduce the complexity of their security infrastructure and increase overall security by utilizing the best of breed suite in technologies.

At the same time, they're also reaping the benefits of reducing the complexity associated with utilizing multiple vendors and the headaches of integration.

Two areas that we continue to address as we look to expand on our current success are the Asia region and the middle market.

Our new management team in the Asia region has begun to generate success, which has been reflected in the region's growth over the last couple quarters.

One factor contributing to the success in the region, as well as, the other regions is our appliance strategy, which has been well received with the introduction this past quarter of the two new Power-1 appliances and 5 UTM models.

From a middle market perspective, we've delivered our new UTM -1 appliances with price points favorable to the middle market that have been well received.

We look to further build on our success by developing initial new relationships with partners that specifically address these markets.

We've realized early indications of the success of the efforts we have made to date by winning many new customers against our established competitors in this market segment.

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

This quarter we continue to see a number of larger deals.

Transactions greater than 50,000 accounted for 41% of total order value compared to 37% a year ago.

We had 14 customers that each had transactions with a value greater than $1 million coming from both Network Security and Endpoint Security products From a competitive standpoint, we continue to make end roads against our competitors during the quarter across all regions for both Network and Endpoint Security Solutions.

This includes both new opportunities and displacements worldwide, as we believe we continue to increase our market share as evidenced by our results and input we received from our partners around the world.

They are very excited about our ever-expanding security solutions and feel we're well-positioned to meet our customer security needs with our total security solutions.

Now, I will turn the call over to Gil.

Thank you, Jerry.

And thank you all for joining us today.

Tal and Jerry have already covered our financial performance during the quarter.

I won't add much from a financial perspective except to emphasize that we continue to be very pleased with our results over the last year and a half.

We believe our financial performance for total security strategy of delivering our customers with a unified security architecture for their infrastructure.

We just completed the Asia Pacific Check Point Experience Conference in Thailand and our customers continue to voice their approval of our products and total security strategy.

The partners I met with were all supportive and showed great enthusiasm by our potential for our new products and strategy.

Moving forward we intend to continue with that strategy.

We intend to continue to execute on the total security strategy and server expand and integrate our comprehensive suite of security product to continue to address the future needs of our customers.

Now for what you've been waiting for, our guidance.

Despite the uncertainty in the world's economy and the challenging condition, we continue to produce strong results over the last quarter.

It's hard to say where these market conditions are going to impact our regions moving forward.

However, so far based on the information we've collected from our sales team, there continues to be an optimistic outlook for the rest of the year.

For the [first] quarter we expect revenue to be in the range of $194 million and $204 million.

GAAP earnings per share is expected to be between $0.34 to $0.38 per share.

Non-GAAP EPS excluding the acquisitions and stock-based compensation is expected to be between $0,41 and $0,41 per share.

For the entire year -- I think I said it wrong.

$0.41 and $0.45 per share is non-GAAP EPS.

For the entire year, I'd like to slightly raise our revenue expectation to a revenue range of, say, $805 million to $825 million.

Thank you for being here today and now I would like to open the call for your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Rob Owens.

Could you give me a sense of what the appliance revenue was as a percentage of licensed sales during the quarter.

Appliance revenues were approximately one third of new product and licensing.

One-third.

Then relative to the gross margin, as you've seen appliance revenue really take off as a percentage of the mix, your gross margins held well over 91% here.

What's the difference between the appliance business and your traditional business?

And what should we expect with the gross margin going forward?

I think overall the appliance sales are contributing higher revenues, higher contribution to the bottom line.

We change a little bit of subscription model but we increase the maintenance and subscription revenues.

I think overall contribution is so far is all positive.

I don't know yet about the margin and how we will see them moving forward.

We do have good margins on our appliance business consistent, by the way, from what you see from our security companies.

Giving a percentage of our total revenue, that's how we maintain the overall growth margin number.

More specifically on that, since you've been in the appliance market now for six quarters, have you driven any cost efficiencies?

Are you seeing higher margins now than, say, you were a year ago at this time?

Or are your gross margins on the appliance business consistent with where they were a year ago?

Thanks.

I think it has slightly improved.

It depends on the mix.

For example, this quarter we introduced five new models update our entire UTM-1 appliance range.

They're much higher performance.

Higher capabilities for the customers and we were able to reduce the cost on these appliances.

Overall we're focusing on both of the scale.

The main focus is being on the forefront of technology.

We're doing that while making sure we maintain healthy structure.

If you look at the history of Check Point for the years, I think we're focused on both sides and making sure our business is effective and efficient and mainly on the customer needs and growing.

Your next question comes from the line of Sterling Auty with JP Morgan.

Couple questions.

First, I didn't hear if it was in the prepared answers.

What was the mix between the network security and the data security?

I think last quarter we mentioned we're not going to break it separately.

We're consistent with that policy.

Okay.

And then on the appliance strategy, you talked about the margins, but can you talk to us in a little more detail about the revenue captured that you might be getting in some of your appliances relative to the opportunity of just selling with a traditional hardware partner?

I think obviously -- I think, first, there's two things to explain.

Obviously the revenue and the contribution per unit much higher when we sell the total integrated solution.

The main focus is not to capture revenue from our partners but to expand to market segments and customers we didn't capture before.

That's what we're doing.

First, most of our clients are in price ranges and performance ranges that couldn't be met before.

Second, we do analyze very closely to check what the deals we're winning and against whom.

For the most part, our replacement of appliances are against Check Point competitors and not through -- not against Check Point's partners.

It's not replacement of all Check Point's partners.

I think the metric that I checked last time that we serviced, it's not data points that we have all the time.

But we did a month or so ago a short survey of customers to see what platform we won again and which platform we replace with them, and more than 90% were competitive with our appliances in Check Point all competitors.

Last question is, can you talk to us with doing more larger deals, are you starting to do more of these deals direct to the customer?

And what impact is that having both on revenue as well as the expense line?

So far all our deals are through partners with consistent strategy.

We have main account manager we've worked with large customers for many, many years.

Eight years now or something like that.

That's not new.

And as I said, I mean, all our large deals we've done with partners and together with partners.

So we didn't have too much effect on the structure or on the margin structure.

High revenue, but nothing beyond that.

All right.

Thank you.

Your next question comes from the line of Phil Winslow with Credit Suisse.

Just a couple of questions.

First, I know you introduced a new high-end appliance this quarter.

Can you give us a sense for traction on the end in addition to the ATM appliances.

Two would be, Gil, I know you raised the revenue guidance for the full year, can you comment on the EPS.

And three, what is your outlook for tax rates for the rest of this year?

I'll start with the appliances and I'll let Tal speak more about the tax rate.

The new Power-1 appliance wound up quite nicely.

It didn't have a huge effect yet because it was shipping for about a month and a half in the quarter.

And remember in high-end sales it's relatively long.

Having said that, it did contribute a couple million, won a couple deal with it.

Did a larger deal with show effect later in the year.

Overall, we're very pleased with the performance of the Power-1.

The Power-1, by the way, between roughly $35,000 to $50,000.

We deliver performance of up to 14 gig per second.

And one metric was introduced to show its strength was to deliver a price performance of less than $4 of Megabits per second.

We got responsive for the first few weeks of shipping the Power-1 appliances.

The what was the other part of the question about appliances?

That was about the outlook for the EPS.

So I think we didn't change the EPS outlook for the year.

I think Tal clearly stated.

Given very good results we have on sales and bookings, I believe we have -- that we could have achieved much higher EPS.

Unfortunately, the devaluation of the dollar didn't help us much because of the EPS higher by $0.03 cents this quarter.

It's very hard to estimate how it will affect the rest of the year for us both because of the currency changes and of our operating plans on how we would structure for them.

We cited so far not to focus yet on the EPS but focus on growing the business.

And we keep the EPS guidance for the year.

Tal, about the tax rate?

On the tax rate it's a continuation of what you just said regarding the devaluation of the dollar, obviously, it's not going to affect the tax rate we're seeing.

In this quarter it was 18% and we expect it to remain at 18% until the end of the year.

And not fully with the balance of the dollar.

That we will see a reduction at the level we used to see from the tax percentage.

Thanks.

Next question comes from the line of Robert Breza with RBC.

I was wondering if you could talk to us about the endpoint and what percentage maybe of revenues or product licensing that contributing.

When you look at the large deals, I'm assuming most of those are multiple products.

I was wondering if there was one product that stands out among the large deals.

It's a nice mix of deals.

Not one.

The entire Endpoint strategy is working quite well.

We have our new unified single agent for security which was introduced earlier in the year.

That's coming up nicely.

Again, this is a relatively new market for us.

We haven't been spending this kind of product in the past.

Even with Endpoint and Data Security we won some very large deals.

We won a quarter deal over $4 million, which is a very nice win for us.

I think our overall customers are large customers buying our entire product.

They usually buy one product or one system.

When you look at the purchase size, usually it's a big project and best project is Endpoint or projects about branch offices or metric security.

Usually each product is separate, a typical one.

It does help we have the full scale and does help our relationship with the customer when they know they can base their entire strategy on us.

A typical deal or sort of single product or single product line deal, each one of them.

Maybe this is a quick follow up for Jerry.

You called out Asia is starting to see rebound there with new management.

How can we expect the geographic mix to shift over the second half here.

Thanks.

I don't know it'll change significantly.

They're doing better but it's the smallest of the three major regions.

The way we monitor our business.

They're doing well.

We're very pleased with the pickup, with the success they've had especially with the new appliances and Endpoint stuff.

I think that we just have the right management team in place today.

We'll see them continue to grow.

I think they have a chance of growing faster than the other regions.

It's still going to be in the 12%, 13%, 14% of our revenue for the rest of the year.

Your next question comes from the line of Daniel Ives with Friedman, Billings, Ramsey.

Can you -- maybe when you guys speak to customers, there's obviously continues to be nay-sayers who listen to this call, even though you continue to do extremely well.

What is it when you talk to customers and what is it about your product that's continuing to see this type of growth?

Maybe you can just anecdotally speak to that as you go around the world talking to customers in a tough environment.

Thanks.

I think our customers like -- our customers like very much the security management culpability that Check Point has.

They do value the quality of the product and the level of security even though it's a little bit harder for them to quantify that.

I think they like the fact we have a unified architecture and our products work and can work for many, many years.

We're talking about customers that have been buying the Check Point architecture and keep upgrading for 10 years.

It's difficult to meet customers like that.

They do like the concept of total security.

Customers would love to see our ease of management and enterprise culpability of management that we know from the metric security side grow to the Endpoint Security.

Even though it's still early to show that.

We're starting to demonstrate that and starting to deploy that.

That remains for the future.

That's a lot of enthusiasm we do speak to today.

They do like the flexibility of the business model.

Again, most of our deals are structured in a very diversified way, in a way the customers buy what they want.

Most of our deals are not structured like upper enterprise companies that you need to pre-invest millions of dollars before you install.

Most of our large customers buy from us every quarter.

All of our customers buy from us every single quarter.

If we have, I don't know, $5 million deal, it would usually come from four to eight quarter in which we deploy the product.

The these are few points.

I'll just add a couple.

It's a good question.

We do spend a lot of time on that.

It really is we have the best product technology and management.

The other thing they like that I hear consistently that's in addition to what Gil said is we're a security company.

That's very, very important to them that they have us as a security company providing a security layer independent of the network and the infrastructure they have.

That's been a very, very loudly discussed for years now point and position that I think is still valid and being resonated in the market everyday.

You'll talk about all the products and technologies but it's also a security company they highly value.

Good answer.

Just another question on the Pointsec.

I noticed on the cash flows that you did pay out some, about $9 million on protect data.

I know you guys have earnout sort of triggers, is that associated with one of those earnouts that obviously you hit one during the quarter and you had to pay out some more cash?

No, it's not relating to end out.

It's just related to the shareholders that took time to purchase their shares.

This is the last minority shareholders of Pointsec.

Okay.

Thanks, guys.

The great quarter.

Thank you.

Your next question comes from the like of Todd Raker from Deutsche Bank.

Hey guys, nice quarter.

Two questions for you.

Can you dig into interesting come your cash balance is growing.

I see the interest income?

Your cash balance is growing but I see the interest income is coming down and interest rates clearly are going down.

Do you expect that to stabilize around current levels or how should we think about that going auto forward?

I think as it's being invested over a period of time, we're seeing the effect of the reduction of the deliver and the Fed rates in the last half year.

The Fed rates reduced from 425 in the beginning of the year to 2 right now.

We're seeing the effect in the quarter too.

So I expect to see continuing to reduce in the next quarter.

Okay.

Given the interest income reductions, why not get more aggressive on the stock buyback?

$50 million this quarter to me is disappointing given where your stock is.

We're continuing to evaluate that.

We discuss it every once in awhile.

Last quarter we approved the new buyback program.

I think we also want to make sure we have enough resources in case we do decide to acquire companies and have the right resources for that.

But I think you're right, this is a good opportunity for us and our Board of Directors will discuss that and will decide how to continue with policy.

Okay.

And then last question for you, I know you don't want to break Pointsec out, can you give us qualitative quantity, were you happy with business this quarter?

This quarter the performance was good.

The growth was very healthy.

We won the deal, one very large deal, many, many smaller deals.

Another point that's interesting is we analyze how many channels of checkpoints sold.

We sold a high percentage of Pointsec.

Most of these deals were very small, but we didn't have huge revenue contribution.

The very good news is we start to see the pick up.

Every channel buys or sells one or two deals, that means we'll start picking up in the next one, two and three quarters moving forward.

Then I think, if I remember correctly, about 80% of our top tier partners have done data security deals in the past few months.

Which is a very, very big pickup.

An excellent fraction rate right now.

Thanks, guys.

The board talked about one huge deal.

We also had a lot of small deals, which is what's very important for us, which is to drive the technology to the hundred thousand checkpoint accounts that we have rather than stick to a few small customers every quarter.

Few large deals, small number of customers.

Thanks.

Your next question comes from the line of Walter Pritchard with Cowen.

Two questions.

One on the maintenance support and services line.

That line a couple years ago was accelerating dramatically.

It seems to have leveled off and was almost flat sequentially.

Was wondering if you could talk about what caused that to flatten out in the last couple of quarters here.

We see a good traction of the subscriptions and the subscriptions before security updates.

Tal mentioned that.

This quarter for the first time in three years that revenue is growing between Q1 and Q2.

What we've seen this quarter the pattern for you is changed a little bit.

Maybe we've seen more in the first quarter and less impacts the second quarter.

I also think we're seeing longer term contracts.

We clearly see more customers purchasing a two year and three year and sometimes even longer maintenance contracts.

And that affects the amortization of deferred revenue.

If you look year-over-year our subscription revenue grew nicely from the same quarter and especially for the second half of the year.

So overall all the metrics are pretty positive about the new revenue.

And second question, you did mention that on a cash you're looking to keep some cash to do acquisitions.

I'm wondering if the current environment given there's not much of an ipo window and the capital markets are tough, are you seeing a more favorable sort of buyer's market and therefore, more likely to do acquisitions as relates to the environment?

Talk us through what you're thinking about there.

Yes, there may be a slightly better on that, but the main challenge is to find the sizable companies that would fit our strategy.

I think the biggest challenge is not many companies are either fit our strategy or show significant revenue and significant revenue momentum.

That would be the main test for a company technologies.

Not to say this company has core technology and we can use some of it.

See customers are willing to pay the price.

Because of the proliferation of the security and because there's so many security companies just hard to find attraction.

That's the main challenge with everybody sees.

But I think, yes, there is a potential for acquisitions and we keep looking for that.

Of the billion four in cash, how many is available to do buyback?

I don't know the answer.

I think it's -- whether it's U.S.

or non-U.S., what's available for buyback, what's left is $360 million at the moment.

I think that's a number you're looking for.

Thanks very much.

Your next question comes from the line of Israel Hernandez with Lehman Brothers.

Can you talk about some of the successes with your appliances?

How much success is attributed to successes within the installed base.

There seems to be a replacement cycle underway.

Particularly, around some of these Nokia appliances.

Can you talk about some of your win rates, competitive win rates with these new appliances relative to Sisco and Juniper.

I think first, I've said it before, more than 90% of our appliance sales are replacing and winning against Check Point's competitors.

Most of it is not just renewing, let's say, a Nokia customers.

Nokia customers are usually happy with Nokia.

Nokia has a good quality of maintaining customers and getting customers.

Most of our wins are in places that we either had harder time winning before or in some cases replaced very old platforms of open servers with Check Point have in the past.

I think we have old cases.

We have cases of new customers.

We have cases of refresh, installed base again from all Check Point platforms earned before.

I think it's really all over the map.

I'd agree.

Like Gil said early on, a lot of the appliances we now have are addressing market segments and price points we've never been in.

Our partners are not in.

This is, you know, 80-plus percent is going into competitive situations in displacing installed competitors and/or new projects.

It's been great for us.

It's a very good addition to our portfolio.

Helping to drive our revenue and successes as you can see.

We're winning a lot against our competitors.

There's just no doubt in my mind from anecdotal stuff, as well as, partners and our results, we're winning market share and gaining market share in the segments we're serving and the new segments we're moving into.

We're very pleased with the situations we have and our success in the marketplace today.

It's very solid, very sound and it's a good story.

Lastly, are you seeing any lengthening of sales cycles due to the macro?

You know, we've been in this, I think, for a long time of people really evaluating and looking at the value they're getting and the alternatives they have.

But it's out there.

It's a concern.

It's an issue.

We've been in this for a long time now of people being aware of their cost and their investments and what they're doing.

In cases of customers saying yes, we need to purchase that.

Other customers saying slowdown in economy, please be aware our budgets might be cut.

We also see customers say our budgets might be cut so we're accelerating the purchasing before it hits us.

I've heard all three answers.

It's very hard to speculate what will happen in the future and even in the past.

Maybe without the pressure of the economy our business would have been better for us last quarter.

I try not to speculate on that and focus on doing what we can to optimize and maximize the business.

Your next question comes from the line of Garrett Becker with Merrill lynch.

On the appliances you guys have continued to keep up a pretty strong pace of introducing new appliances.

Just wondering if we should expect that to continue at a similar pace going forward, if you think you pretty much have the different market segments pretty well covered at this point?

I think we have the right market segments covered.

I think we're up to date now with the latest events of platforms for the year.

We'll start looking what's our next step for next year.

I think one of the things I've tried to institute and we want to be at the forefront of technology.

We chose platforms that we can rely on revolution of harder platforms and get more price performance and more performance to our customers.

I don't know now to say if our next update with the products line on the harder platform would be six months from now or -- I don't know -- or 18 months from now.

We're right now our cycle, the last cycle we had was good was about one year.

I think it was intentional we wanted to show that we keep enhancing the leadership and keep raising the bar for the prized performance we can deliver.

We just completed that two weeks ago with the introduction of two new UTM-1 motor in Thailand.

I think another important fact there is that unlike our competitors when they do a refresh on their hardware, they actually usually change their platform completely.

With Check Point our software remains consistent while we may upgrade the hardware as such, the software that our customers are receiving on our appliances and also directly in our software program or through our partners remains consistent.

Okay.

That's helpful.

And then just on the shekel impact, you mentioned before, I don't know if you mentioned, did that have a greater proportionate impact on R&D or did that also impact sales and marketing line?

I think the biggest proportion was R&D but it also impacted sales.

We have many sales people not in the US, in Europe, Asia and other places.

I think probably the biggest impact is in the Sheckel.

Also, the Sheckel was the strongest currency.

It was stronger against the dollar.

Did much better against the Euro.

It did have effect on the results, especially sales.

Marketing too, but was somehow with some lesser expense.

Thanks very much.

Your next question comes from the line of [Monish Hemojoni].

Good quarter.

Are you seeing more of a demand on the lower end or the higher end of the appliance front?

Can you talk a little on asps, how they're trending sequentially.

I'll talk about the demand across the different appliances.

I don't know that I could off the top of my head say it was one of the other.

We've been doing both.

I'm just trying to think a lot of the successes have been, with the whole UTM 1 line, we announced better models, we've been successful in our integrated appliance strategy at the high end.

The new Power-1, as Gil said, was late in the quarter or middle of the quarter when we introduced it.

We see great enthusiasm there.

I don't think there is one that stands out in my mind.

I don't know if Gil has a perspective from his different travels and meetings.

I think across the whole spectrum, we see a lot of success and excitement because they're addressing different market segments which are appropriate in different parts of the world.

It's not one over the other.

They're all doing very well right now from an interest in the marketplace standpoint.

What was the second part of the question?

Can you talk about the asps on the appliance front?

How are they trending sequentially?

Do we have that -- the asps --

I can't say for sure, that's a trend we keep seeing.

Not too much again about the appliances.

We had great growth forward last year with the high-end appliances.

We had excellent growth both against last year and quarter over quarter with the mid-range appliances.

And the lower end appliances continued to stay stable.

The low end, I mean sub2000.

5,000 to 20,000 appliances, for example, almost doubled a quarter over Q2 over Q1, for example.

Got it.

That's the UTM-1 model, by the way.

Regionally, can you throw some color on where you're seeing geographically in terms of post-revenue deals?

First quarter I think we've seen balance of all our sales organizations.

That's very good.

Jerry did mention the two best regions so far for the year are the US and Asia-pacific.

As I said, I think we had great performance across the world.

I'm not going to indicate anything else.

One last question.

What are your assumptions fort Sheckel in guidance?

A better financial expert, I think we should stop guessing.

I think the devaluation was so strong in the last two quarter it looks like it hit bottom and it didn't.

I can only hope that it did and it will rise now.

I think it would be unfair to make any guesses.

I think if I understood your question, you're asking what did we assume the guidance for the rest of the year.

We assumed there won't be any material additional devaluation.

You're using the current level of the Sheckel.

Yes.

Most of our budgets are done in slightly different budget level.

Got it.

Thank you.

At this time due to time, we request that you limit your questions to just one question.

Your next question comes from the line of Brian Freed with Morgan Keegan.

We've talked a lot about your enterprise business.

Can you talk a little bit about your consumer and small business and particularly what you're seeing in terms of uptake for your virtual browser?

Virtual browser is a new category, a new product.

It is a very good acceptance in terms of, say, market for use and even generated revenue which is not bad for a consumer product for sale for $20 or $30.

It improved this quarter.

But again, it's not a big part of our business.

I don't think that's where the strength of our business comes from.

One just clarification, there's been a couple questions asked about strength.

Within the US enterprise, which was obviously strong, were there any particular industry segments that were strong or weak?

I imagine we're all particularly interested in financial services.

Financial services were good the first half of the year.

And also the second half of last year.

But I don't think there was one sector that drives.

Even with the best services for Check Point is less than 20% of revenue.

One segment, by the way that's interesting about the financial sector, that sector is harder to classify in terms of geography.

The bigger institutions are completely global.

I'm not saying it's random, but you can take the same company and they can decide their purchasing is out of London, Switzerland, Germany, New York.

Between London and New York it's almost random where you see the purchases coming from in the big picture.

Your next question comes from the line of Michael Turits with Raymond James.

Not breaking it out, but the growth rate you said last quarter was 25%.

Just wanted to see if it was roughly that level or higher or lower?

And also on the refresh cycle, sounds like you're saying refresh, by definition, more like 20% of 80% for new customers.

Still, it's meaningful.

Do you see any slowing the opportunity for the refresh cycle going into 2009?

Growth, as I said, we don't want to break that.

I think it's the same order of magnitude in terms of new growth.

I'm not going to break it to higher or lower.

It is the same kind of ballpark.

Again, the second part --

The second was on the refresh cycle in hardware which has created and opportunity this year.

You said 80% is from new customers and new opportunities.

On the other 20%, do you see any slowing in that opportunity in the hardware refresh cycle either off of Nokia or off of Sisco going into 2009?

Remember, the 80%, a lot of that is refreshed.

We're displacing currently installed product and their looking at refreshing and their refreshing with Check Point as opposed to the incumbent.

Same question.

Any slowing at all in the refresh opportunity into 2009?

Very hard to say, but I won't say.

It should be the opposite.

I think the market is not -- first of all, the market is relatively diverse.

It's not a market of like one or two big side deals.

In terms of the competitors.

I really don't think we have a refresh cycle.

It's hard for me to say if it was part of recycling.

I think it's ongoing, Michael.

People are continually looking at the next generation and upgrading and expanding.

Some are new projects, but a lot of it is a continual thing.

There's not just one refresh cycle that happens once every three or four years.

It may be three or four years after people buy it.

People buy every month, every quarter, every year.

One more thing to remember.

Our sales model, some build with one say Q4, Q!

or Q2 are sort of the one or two-year deals.

So what we recognize and what we told you about was the revenues or the order that we already got.

In many cases, let's say a $5 million project, we got the first one, the first two, the first quarter we get a little more Q2, a little more Q3, a little more Q1 next year after they roll in the device.

It's usually not one type.

I think slightly different in the typical enterprise, software kind of sales when you buy 10,000 licenses for the entire enterprise.

Here we provide 300 Gateways to operate the network.

Slight upgrade will take six months to 18 months.

You said the maintenance contracts seem to be getting a little longer.

So Tal, has there been any shift to a higher percentage of long-term deferred as a percentage of the total deferred revenue account?

I think we're starting to see some shift, but it's still minor and not materially at this stage.

We're probably going to start seeing the larger transaction over the longer period of time we will see some shift towards that in the deferred revenue.

Thanks.

Your next question comes from the line of Todd Weller with Stifel.

If you look at your core network security business growth had been trending kind of in the 14% area.

Just curious how you think about the sustainability -- sustainable growth of that business.

Are you trying to drive this to a mid-teens growth story or more of a 10%?

How do you think about that?

We'd like to drive it as high as we can.

The efforts we're making, we're making all the right efforts for that.

10% growth, 20% growth more or less because it's hard to say, but we definitely are putting all the ingredients to continue in seeing growth.

Things like larger solutions that we provide like appliances all provide a lot of potential for future growth.

And one other follow up, Gil, on the Power-1 appliances, has there been any change in the way you're packaging and pricing the support for those appliances relative to your other appliances?

Yes.

Generally speaking the support percentage is lower than other solutions.

The total support revenue is much higher because we're selling much higher price product.

Revenue is extremely well with customers.

Very attractive rate.

Usually when you buy a product you look at what percentage of support.

You may much lower rate.

We're extremely happy about that.

On the other hand because we're selling the solution at the price two, three, four times higher than what we got before for the same unit, we're getting more dollars per unit.

So I think it's a win-win for everyone.

Thanks.

All right.

I think we're out of time.

Thank you today for all your questions.

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Market is about to open, folks, so have a great day.

Thank you.

This concludes today's conference call.

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