Check Point Software Technologies Ltd (CHKP) 2008 Q3 法說會逐字稿

Greetings and welcome to the Check Point Software Technologies third-quarter 2008 financial results.

At this time all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Kip E.

Meintzer, Director, Investor Relations for Check Point Software Technologies.

Thank you, Mr.

Meintzer, you may begin.

Welcome to all of us joining us today.

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

On the call with me today are Gil Shwed, Chairman and CEO; Jerry Ungerman, Vice Chairman; and Tal Payne, Chief Financial Officer.

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

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

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

For your convenience the third quarter results replay will be available through November 11.

If you would like to reach us after the call please contact Investor Relations at plus 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 the call Check Point representatives will make certain forward-looking statements.

These forward-looking statements may include our belief that one of the key drivers of our success is that our products are in line with the security needs of our customers, our expectations regarding the potential impact of market conditions on our business as we move forward, our expectations regarding our business outlook for the rest of the year.

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

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

Factors that could cause or contribute to such differences include but are not limited to the risks discussed in Check Point's Annual Report on form 20-F for the year ended December 31, 2007, which is on file with the Securities and Exchange Commission.

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

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

Thank you, Kip.

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

I would like to share with you the financial results of another great quarter for Check Point.

Our quarterly results reached the upper range of our guidance for both revenues and earnings per share as we continue to execute on our strategy.

Before I provide you with an overview of the financial highlights for the quarter, I would like to remind you that the third-quarter GAAP financial results including equity-based compensation expenses in accordance with FAS 123R, expenses relating to our acquisition and impairment of marketable securities in accordance with FAS 115.

Non-GAAP information is presented excluding these items.

In our press release which has been posted on our website, we present GAAP and non-GAAP results along with reconciliation tables which highlight this data.

Now I would like to share with you the financial highlights for the third quarter of 2008.

Revenues for the quarter were $199.7 million, an increase of 9% year-over-year.

We continue to execute on our total securities strategy during the quarter as we continue to add many new customers across all industries.

We continue to see strength across our business with Check Point's UTM-1 and Power-1 appliances contributing the further growth.

From a geographical standpoint, our revenue growth was led by our enterprise business in EMEA with increased demand across the Asia-Pacific region.

America contributed 42% of our revenue.

Europe, Middle East and Africa with 45%.

And Asia Pacific and Japan region contributing the remaining 13%.

From a deal size and quantity perspective, this quarter we continue to see an increased number of large deals with transactions greater than $50,000 accounted for 44% of our total order value compared to 40% a year ago.

There were eight customers at each at transaction with a value greater than $1 million coming from both network and endpoint security products.

Our product and license revenues were $82 million representing 7% growth over the third quarter of last year.

These ranks one of the best results we have ever had in any quarter and the best third quarter in the recent years.

Year to date we have realized double-digit revenue growth of 13%, both in product and licenses revenue as well as (inaudible - highly accented language) maintenance and service revenue.

GAAP earnings per diluted share for the third quarter of 2008 was $0.37, and non-GAAP EPS was $0.44.

Growth came in the high end of our guidance mainly as a result of our top-line performance and expenses control.

From an operating perspective, we posted a record high result, our nonoperating margin increased to 53% for the quarter up from 52% in the comparable quarter last year and the highest we have had recorded over the last six quarters.

This was mainly as a result of our expense management, coupled with seasonal decline in marketing expenses and assistance from the slightly improved strength of the US dollar against our other currency, bear in mind this currency exchange rates remain under our plan and below the year-ago levels farther underscoring this great result.

Our effective GAAP and non-GAAP income tax rate for the third quarter was approximately 19%.

In the range we have previously communicated.

Deferred revenues for the quarter were $273 million, an crease of $46 million or 20% growth over the third quarter of last year.

We are continuing to retain customer renewal at a very high industry rate.

In the third quarter of 2008, we generated cash flow from operation of $115 million, an increase of 30% compared to the same period last year.

The operation cash flow includes $22 million refund from the Israeli Tax Authorities received during this quarter.

Our cash and marketable securities at the end of the quarter increased to over $1.4 billion in line with our strong cash flow.

The credit quality of our portfolio remains high and consistent with our conservative investment policy.

During the quarter, we recorded a minor writedown of $2.3 million relating to impairment of Lehman Brothers and in accordance with FAS 115.

During the quarter we purchased approximately 2 million shares for approximately $50 million and we have now approximately $300 million remaining in the current active share repurchase program.

So to summarize, overall I am happy to report such good results with profitability and revenues at record levels.

And now I would like to turn the call over to Jerry.

Thank you, Tal.

And good morning to all of you joining us today.

I would like to begin by expressing how pleased I am with our execution during the third quarter.

We believe one of the key drivers of this success continues to be our total securities strategy and the delivery of our expanded portfolio of security products that are in line with the needs of our customers.

What I have heard repeatedly from customers as I interact with them in our customer advisory groups which I did again this quarter in both New York and London is that they are looking for a security infrastructure partner they can depend on to address their current and future enterprise security needs.

Today we are able to addressed security demands of our customers in both the physical and virtual network environment and also at the endpoint where we have the only single agent of its kind available in the marketplace today.

We are also able to provide our customers with the ability to manage their security infrastructure from a single management console, which has become a compelling asset of our total securities strategy as customers look to improve the complexities of their security infrastructure and operational cost while maintaining the highest levels of security.

Our comprehensive suite of total security solutions built on our unified security architecture are designed to address the challenges facing enterprise IT professionals today and into the future.

From a partner perspective, we continue to implement programs to closely align our interests with partners and allow them to enjoy the rewards of our expanded product suite.

As we have spoken about in the past, we would like to add partners with expertise in the new products that make up our standard portfolio.

Over the course of the last quarter we have done just that by adding approximately 400 new partners who are focused on selling and implementing our total security products in the marketplace.

We will continue to recruit new partners to address the growing demand for Check Point products while targeting future partners that address business segments and geographies where we are underserved.

On the competitive front, we continue to make further inroads against our competitors across all regions.

This includes both new opportunities and displacements worldwide.

We believe we have continued to increase our market share as we continue to receive input from our partners around the world, illustrating their continued success, and we believe it is also indicative in our financial performance.

We have found our partners old and new that are excited about the new opportunities available to them as we have continued to expand our portfolio of security solutions.

And they continually tell us that the customers they work with are looking for a vender who is totally focused on security that secures both their network and data.

We believe we are well-positioned with 3,000 partners worldwide and a portfolio of products focused on providing total security that allow us to address our customers' infrastructure and security needs now and in the future.

In conclusion, I would like to say that we continue to be very encouraged by the demand for our security products across all business segments, industries, and geographies during these challenging economic times.

With that, I will turn the call over to GIL.

Thank you, Jerry.

I also would like to thank everyone for joining us today.

As you know, these are not easy times for the world economy around us.

Despite that, I am proud to see that during the last quarter, we continue to deliver good results at the upper range of our guidance.

While the market conditions around us have affected us in some way and we continue to have an affect on everyone's business in one way or another, it is very encouraging to see the strong results we produced in a seasonally challenging third quarter.

This quarter we met personally with many customers and partners even more than usual.

The feedback we received so far is quite encouraging.

Customer wants to hear more about our strategy and expanded portfolio, and while everyone is concerned about the economy, some see it is an opportunity to streamline their security operation, consolidate multivendor purchases to Check Point, and enjoy the benefit of our softer architecture and our new appliance solutions that deliver great value.

Our sales team continue to have a healthy pipeline and forecast for the fourth quarter which is in line with our previous pledge.

It is hard to make any prediction, but we'll stay consistent with our policy and provide the current estimate that we have assembled from our team.

For the fourth quarter, we expect revenues in the range of $209 million to $228 million.

GAAP EPS is expected to be in the range of $0.34 to $0.44 per share and non-GAAP EPS is expected to be in the range of $0.45 to $0.51 per share.

These numbers remain consistent with our previous guidance and are actually slightly higher than our original guidance that we gave at the beginning of 2008.

I hope that our execution will enable us to finish the year on a high note with minimal effects from the economy.

Now let's open the call for your questions.

(OPERATOR INSTRUCTIONS) Our first question is coming from the line of Rob Breza with RBC Capital Markets.

Please proceed with your question.

Actually we have -- we have a question from the line of Brad Zelnick with Bank of America Securities.

Yes, good morning.

Thanks for taking my question.

I guess the top question on my list would be around the Americas, contributing only 42% of revenue in September, down from 44% in June and 47% a year ago.

I mean, I would expect that part of that is from the obvious trends in growth in Asia Pac and EMEA but can you tell me more specifically about the demand environment and what you saw in the market in the Americas this quarter.

I can't say that we saw anything very different than usual.

I think you have indicated right.

We had better -- we had good results in EMEA and we had very good results in Asia Pacific if I look at the trends specifically.

Other than that, there is nothing -- except the general economy that we saw, there is nothing different that I have seen so far.

As I said, I think our Americas team still has a healthy forecast for the fourth quarter.

There are two deals from the third quarter, but they should have gone and maybe they will go in the fourth quarter, but, again, nothing major unusual.

Thank you.

Thank you.

Our next question is coming from the lane are Bert Becker with Merrill Lynch.

Please go ahead with your question.

Good morning.

As I am looking at the guidance, as we -- Europe continues to do well for you guys.

And just wondering if you could comment a little bit on the linearity in the quarter, and also as we think about the guidance, how are you thinking about Europe and how sustainable do you think the growth in Europe is, excuse me, going forward?

First the quarter was back end loaded.

It remains back end loaded and the trend of quarter is becoming more and more back end loaded is something we have seen for the last -- for the last couple of years.

So that's about the linearity.

In terms of the overall business, as I said we have a healthy forecast from Europe.

We have a healthy forecast from the Americas.

The main region that we are seeing growth beyond the same kind of numbers is Asia.

And that's very good, because I think we can do much better there.

Great.

Then on Nokia, maybe a quick follow-up.

Do you expect any impact from the sale of Nokia?

Well, sale of Nokia, it is an interesting move.

On one hand I think it does have a good potential to strengthen a little bit the position of Nokia, because it will give more focus, something that has already started earlier this year, but to refocus their efforts on competing and selling better appliances.

So I think from that standpoint it is not bad.

From the Check Point perspective, it is actually very positive because it opens up more opportunities for us.

We have been very consistent and not to compete with Nokia with our own appliances.

The move that Nokia made makes more customers ask for it and more customers interested in the Check Point appliances and I think that has, both in the short term and in the long term a lot of upside potential for us.

And, again, as I said, I hope that this upside doesn't come at the expense of one of our partners, but nevertheless, it should have very positive impact on the Check Point financials.

Is there any chance that you would consider buying them at this point?

I think we announced that we have financial buyers.

I can't comment on behalf of them or any other ways of a deal.

Great, thanks.

Thank you.

Our next question will be coming from the line of Sterling Auty with JPMorgan.

Please proceed with your question.

Thanks, good morning, guys.

A couple of questions.

On the software update, maintenance and service seem to have a very good result in the quarter, can you give us a little bit more color whether it be quantitative or qualitative as to the contribution, where the strength came from.

Was it the services side or was it the subscription and maintenance side?

Well, first a big part of the world, we sell the two together.

So we have the Smart Defense security update program that continues to perform well, but that is a small part of the subscription revenue.

The rest of it is a softer outlook in the maintenance.

In the US which is sold separately and the rest of the world is sold combined so you cannot separate the too.

Overall, I think we have good results all over.

We are tracking our renewal rate and our renewal rate remains in very high percentage, well over 90%.

And it has stayed consistent during the quarter.

We so far didn't have an effect for renewals from a sector that were under pressure.

We have seen -- even from this sector so overall, the business behaved -- behaved okay last quarter.

But this was the first quarter it kind of stepped up again since -- since last December.

In other words, if we look at March, June, it seemed pretty stable.

Was there anything in terms of either price increases or customers taking on additional subscription or -- seems like there is -- there should be something here to describe the strength?

Well, actually I remember that question from the previous quarter, and we said that it is not the phenomena that we saw it staying on the same rate between Q1 and Q2 and we do expect to see it picking up again in Q3 and that is exactly what happened.

We pointed at that moment if you would have looked at the deferred revenue level at the end of Q2, you would have seen it actually increased where it typically decreases and therefore our expectation would be it will continue to pick up.

Nothing in essence of the big, just location between quarters.

That's all.

The only phenomenon that I can say about our subscription which is starting to happen and what I am giving as some early notice on that.

We see more and more subscription contracts that are multiyear, the percentage of new contracts, right now it is fairly small, but the one thing with the phenomena that we see starting to happen again overall is a very positive phenomenon that we would like to buy four years and five years contracts and not just one year contract.

I know you don't break out the network versus the data security anymore, but I missed if you made comment.

Can you at least give us a description or some color as to how much the Check Point appliances specifically kind of contributed to the quarter, whether it be percentage or dollar amount?

We don't break with (inaudible) but the appliances did very well.

We had two new appliance lines that we launched in the second quarter and they both performed extremely well and we see very very healthy growth on that side of the business.

Part of it is taking softer sales and converting them into appliances, part of them is actually converting all software licenses that are already in the market and participating the upward cycle there that we didn't participate before.

But in both cases we have seen some nice successes.

So if there is one area of performance that did good in the financial front is the performance of our appliances.

Okay.

And last question--?

(Inaudible) is our high-end -- our one appliances that are very, very new to the market so the fact that we even see contributions from it picking up is very positive because for such high-end products it is usually a long spin cycle.

My last question is on cash flow.

It seamed like the accrued liabilities jumped up in the quarter to help cash flow.

Is that something that is going to reverse itself in the fourth quarter?

How should we be thinking about the cash flow this quarter as it relates to what you might generate next quarter?

Operating cash flow was positive and in line with every quarter.

We have a positive cash flow.

The significant spike that you saw for the positive was the result of a refund we receive from the tax authority.

So, no, we paid it historically and we received a portion of it back during the quarter.

So, no, it's not something that will run into next quarter.

Okay, thanks.

We are trying to build the strongest cash flow we're probably going to have in Q1 once we collect the December -- the December accounts receivable.

So remember in terms of that behavior, the strongest cash flow hopefully is expected in the first quarter.

All right, great, thank you, guys.

Thank you.

Ladies and gentlemen, in the interest of getting as many questions as possible, we ask that you limit yourself to one question.

Our next question will be coming from the line of Shaul Eyal with Oppenheimer and Company.

Thank you.

Good afternoon, guys.

UT Micro acquired within the recent months that you are computing getting acquired by McCaffey a number of months ago.

Have you seen any near-term benefits on the data security front from those consolidation events?

No.

I don't think that we have seen the benefit from that yet.

I think the consolidation in the industry general not just in that specific area should work in our favor.

We are one of the largest vendors, customers see us as a good partner, as a Company that is stable, that is good to do business with, so I think overall, I think I have indicated a little bit about that that we have seen more and more positive reaction from customers to look at our combined portfolio.

So far from this acquisition, I don't think that we have seen -- that we have seen any -- any effect on our business.

Fair enough.

Just one final question.

Specifically in Europe which has very stable for you this quarter can you provide us with slightly more color on what exactly -- where the strength came from, what countries, is it Western Europe, Eastern Europe, how do you kind of look at it?

I don't have it right now in front of me but if later in the call we will find more data on that, we will be happy to share it.

We are checking right now.

Thank you very much.

It wasn't -- to be clear, that means that there wasn't any big unusual activities that jumps to our minds right away.

Thank you.

Our next question comes from the line of Robert Breza, with RBC Capital Markets.

Please proceed with your question.

Thanks for taking my question.

Gil, maybe just looking at the product licenses it was down quarter over quarter.

You mentioned the appliances doing well.

Was there anything that didn't meet your expectations in the quarter whether it was the Firewall 1 or the Endpoint?

Just talk qualitatively how the product licenses met your expectations.

Thanks.

I think the unusual quarter was Q2 and if you look over the years, almost every year if not every year, Q3 was slightly down from Q2 and we checked it very clearly and that's the pattern that we have seen almost every year.

And I think this year maybe the exception was in the second quarter it was was a very strong due to I think overall execution of what we have done but also due to some large deals.

This quarter, by the way, we also had few large deals.

One in particular around the Endpoint, but that large deal is actually on the small portion of -- it got recognized in this quarter and most of that deal will be recognized over the next year or year and a half.

So that is the general explanation here.

Thanks, maybe Tal just a quick follow-up on the taxes.

It was a little bit higher than we had anticipated.

Should we use the 19 or is 18 a good number for Q4, thanks.

It changes slightly each quarter, but I think 19% is a good number?

Thank you.

Thank you.

Our next is coming from the line of Israel Hernandez with Barclays Capital.

Please go ahead with your question.

Hi, everyone.

With respect to buybacks, your stock has come down quite a bit along with practically everything else in the market.

You guys are sitting on $1.4 billion in cash.

Are you guys thinking, perhaps, of maybe getting a little more aggressive given -- given the current valuation, of the stock?

It would seem you appreciate having a strong balance sheet, but $1.4 billion seems a little bit on the ridiculous side.

If you could just comment on your cash position please.

So the short answer is, yes.

The little bit longer answer for what you have asked is -- I think we never tried and I think we have been fairly consistent not trying to bid the market or to be opportunistic.

In the short term, yes, we do intend to slightly increase the buyback amount this quarter.

Let's also remember that we -- that we want to use the cash for other purposes.

And while I don't know that specifically something may or may not happen, this may not be a bad time to use this cash for other purposes.

So we are not going to try to get rid from the cash too quickly at this point.

Great, thank you.

Thank you.

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

Good quarter.

I just want to dig into the hardware side a little bit more.

Gil, last quarter you suggested that appliances were about, give or take, about a third of revenue or third of sales.

I was wondering if that is still true if we are actually seeing that trend higher?

Then over time what is the appropriate mix for appliances versus software in the firewall space?

First what we said last quarter was about third of the license revenues, not of the overall revenues.

And I think that trend continues to increase and fit was a higher percentage this quarter.

As we said, the appliances did well so obviously it was higher.

I don't know if we have a special prediction moving forward.

I think it will go higher.

I think because we just launched some product line where they are growing very nicely.

If I look in the foreseeable future, it should go higher.

I don't know necessarily that I have any long-term expectation out of that.

I think the value that we provide is in our software.

The appliance is a great delivery mechanism, it enable us to do many good things.

Get better control over the deal.

Meet the customer requirements in a much better way, participating in operating cycle that happens in the marketplace and that is an important potential for a change in our business model.

So I think there is a lot of good things about that, but also let's not forget that the main value that we deliver and the real reason that people buy Check Point is because the advancement of our software and because the benefits from our software architecture, and this will hopefully remain for many years to come.

Great, thanks, guys.

Thank you.

Our next question will be coming from the line of Rob Owens Pacific Crest.

Go ahead with your question.

Good morning.

A couple of questions.

First of all with the guidance and looking specifically at North America, should we expect it to grow year-over-year in the fourth quarter or should we expect another flat to down result?

Yes.

It should grow in the fourth quarter year-over-year.

Again, as I said before, it's making prediction in the difficult environment, as you all know unrelated to Check Point is very difficult.

If you look at what I am expecting and what our salesforce is expecting, they absolutely expect to have a good fourth quarter and to have a fourth quarter this year that's much better than fourth quarter last quarter.

Then second thing--.

Second, looking at the product revenue, can you give us any color around how much of that revenue comes from new opportunities, what's coming from displacements, and what's coming from Check Point upgrades to appliance solutions?

It comes from all over.

I don't have any metrics to share at this point, but we are starting to be much more analytical about measuring these things.

So this quarter we continue to add more count.

Well over 1,000 new accounts.

Very consistent, by the way, with previous quarters.

It is not unusual, but every quarter we have -- we had many new customers.

In terms of industry that came from all industries, from Bob's question, we weren't up yet -- but I will just say that because you raise that point, we have seen good sales, for example, to the financial sector this quarter.

Roughly financial insurance, all the related industries are about 20% from our sales of this quarter.

It was the -- it remains -- and was slightly higher than the previous quarter in terms of percentage.

So not necessarily, displacement of competition.

We win competitive bids very often.

And I think what we are now doing with our appliances, we can also participate in the upward cycle of many of our customers and not just replace competitive products.

So that's is the opportunity again.

It won't materialize over one or two quarters, but over two and three years.

Great, thank you.

Thank you.

Our next question will be coming from the line of Walter Pritchard with Cowen and Company.

Thanks.

Two questions.

One, just, Tal, a quick question around the cash and impairment.

Is there any cash on the balance sheet that is actually restricted and not available for use?

And I had one follow-up on the product side.

The cash -- all of it is available for sale.

Our practice is to hold it for maturity.

There's some small amount relating to an option rate, which is practically -- we receive the interest rate every month, but no majority of it is available any time we would like it.

And then, Gil or Jerry.

Maybe you could just help us out.

You mentioned a couple times participation in the firewall upgrade cycle and we would like to get your perspective where we are in the upgrade cycle there and in a refresh and so forth.

Is that sort of a beginning of the cycle here or end of the cycle or any color on that will be helpful?

Well, in my view, it is a continuous cycle.

People are making decisions every day in three, four, five years out and there's no one time when anything happens.

So it is a continuous process that we are involved in all the time.

We see a little bit more right now.

As I said a lot of people -- and I think Gil mentioned it with the operational cost and consolidating.

One of the attractive things we bring not only with our appliance but both with the breadth and depth of our products on both network data is that we are allowing people to consolidate and use our single management console and or single end point agent that has proven to be very very attractive.

We are in a continuous upgrade cycle with all of our customers as well as getting -- that's where we are winning a lot of displacements when customers are looking to displace current infrastructure for a variety of reasons, but that's a continuous ongoing basis, there is no start or end to this.

Thank you.

Thank you.

Our next question will be coming from the line of Todd Raker with Deutsche Bank.

Please proceed with your question.

Hey, guys.

I wanted to dig in on the operating expense side.

Down $6 million sequentially.

Tal, I know you mentioned a few factors here.

Could you guys quantify the impact of the Israeli shekel in the quarter and talk about headcount growth and if we start and see a headwind on the revenue side in future quarters, how much flexibility do you have to manage to your operating margin and EPS from a headcount and spend perspective?

I will start on the first part and then Gil will provide the end of the -- answer to the end of the question.

First, the shekel, the strengthening of the dollar against the currency does not have a significant effect when you look at the effect in (inaudible) operating income and financial income.

So I would say probably around $1 million or so on the net income.

The majority of that came actually from expense management and some seasonality that we typically see in the marketing expenses.

Remember Q3 seasonally the quarter that people spend less.

Even the fact that people take vacation in the summer actually reduces the accruals for vacation which has -- which has an impact of probably a few hundred thousand dollars on the expenses for the quarter.

So I think there's a lot of things that came from different areas, not just from one.

The same goes for the headcount.

Our headcount remains relatively stable.

We didn't -- we tried to slow down hirings, we tried to keep things tight, but we'redefinitely not planning any cutbacks in the headcount that we have.

And actually right now it is the time that we start planning for 2009, yes, and think where do we want to invest and where do we want to grow and where do we want to keep things tight and more under control given the current economy?

Okay, thanks, guys.

Thank you.

Our next question is coming from the line of Michael Turitz with Raymond James.

Please proceed with your question.

Hi, guys.

Two questions.

First, just an update on Pointsec, is that still a 20% plus grower or is that in the mid-teens?

Then I got a follow-up.

I don't remember the results for the year, but I think so far it grew year-over-year, and I don't have the exact data -- it is also important to note that we are now consolidating all the Endpoint product line so we are not tracking any more (inaudible) we are tracking with the full Endpoint products for Check Point and I think -- this quarter we had some nice breakthrough in a large deal in Japan.

Most of it wasn't recognized in revenue but most of it was a deal that we want, it's a multimillion dollar multiyear deal that opens up an important avenue for us.

And we keep working with it.

I mean, we are just making -- the way we look at it, we are making our first step into the Endpoint security market right now.

And the next question is -- obviously you said that you have got a healthy pipeline.

Are you seeing any signs of your end markets tightening up?

Are you seeing maintenance contracts shortening?

Are you seeing any -- anybody pushing out their hardware refresh cycles?

I think we have seen a mixed bag of it.

First, I mean in terms of general trend, the maintenance contracts are getting longer, not shorter.

We have seen many more customers that would like have a three-year and five-year maintenance contract now than we have seen before.

As I said still a very small portion.

Still less than 10% of our deferred revenues, but it is still for was zero a couple of years and now it is starting to be -- it is starting to be tens of millions of dollars in the deferred revenue and we definitely see an increase there.

Customers are tightening up budgets.

There is no doubt about that.

For some customers that is an opportunity, and we said if we have the budget and if we can justify an operational efficiency let's do the upgrade now and not wait.

For other customers, obviously projects are getting -- are getting prolonged and they are not happening quickly, but as I said, people are still in business, people are still buying, people still want to get the benefits of things.

And I will repeat the -- while it is very, very hard to predict the future, I think that without the economical situation of the world last quarter we could have had an even better result.

Again, it's not that I can point up to something that we missed, but obviously that is the reality of our world.

Thanks, guys.

Thanks very much.

Thank you.

Our next question is coming from the line of Daniel Ives at Friedman Billings Ramsey.

Please go ahead.

Just one question.

In an environment like this as you guys have been through cycles like this, what is it that do you differently with the sales force, channel partners, customers given the macro uncertainty?

Can you just walk us through, how your approach as a management team changed in terms of pipeline and customer feedback and discounting, things like that?

Thanks.

I don't think it changes in a great way.

I think we are always trying to be flexible and we are always trying to meet customer requirements.

On the other hand, we run a very open and transparent business models.

Our prices is posted on the web.

Our channel discounts are fixed.

We do give sometimes special consideration but these special consideration is very well structured and touch only a small part of our business.

So if you look at the effective discount measurement that we measure internally compared to the -- compared to the discount on the price -- from the contracts to partners.

The difference is not big at all.

And I think people and customers and partners will appreciate that.

They will appreciate the fact that on one end there's flexibility, and the other end it is not a -- practices are transparent and the customer knows that when they buy from Check Point, they get a fair deal no matter what, and not just based on their negotiation skill.

So I don't see any big changes around Check Point.

Jerry can you -- do you have any more to add?

No, I absolutely agree with you.

Just the story becomes more compelling in these times.

We don't know what they can ultimately do, but the fact -- I went through the whole thing about the broader product portfolio, the single manage accounts, single agents.

This is all really compelling stuff in these times and makes our stronger story relative.

We just re-emphasize the key points of what we bring for both the benefit of the partner and the partners and the customers in dealing with their security needs.

So that doesn't mean they can always spend whatever they want to spend, but I think on a relative, competitive position, it speaks very well to some of our strengths.

Maybe let me translate what Jerry said or shed some light on that.

As a real example, I met with a major customer of ours.

A year ago we met and discussed consolidating IPS into the -- into the firewall and the Check Point environment, the customer wasn't that interested, yet I had this group and this group and we're both operating and we are working with your solution, we are happy and we are working with another solution and we are happy too.

So there was no pressing reason to do anything with that.

Today when I met this customer I said you see you can consolidate with two infrastructure and you can get a lot of operational savings and a lot of purchasing savings by having one infrastructure with Check Point.

The customer was very interested.

They said, okay, now is a good time to hear about that and I'll encourage my team to hear not just about that example but any opportunities that you have to help us streamline our operation.

I think we remain a very good position because if you look at security agency with few hundred vendors, most enterprises deal with tens of vendors and I think Check Point from every customer that we have is one, two or three key vendors that they work with and definitely in our space, in the network security space we are the leading vendor for them, so the examples gives us a better position than we have been before.

Thanks.

And keep up the good work.

Thank you.

Our next question is coming from the line of Brian Freed with Morgan Keegan.

Please go ahead with your question.

Thanks for taking my call.

If you guys continue the internal product cycle of integrating your management console across your data security products do you see any particular trends within your revenue forecast?

Do you think that is going to be pretty linear in terms of its progression across borders and not cause any internal product cycles in terms of customer policies, et cetera?

At this point I don't see any big changes.

Definitely in the fourth quarter, we are not -- we have not planned any big revolutions on the product.

I think the biggest change that we had -- that can change the financial behavior in -- in a significant way is introduction of our appliance line, the Power-1, the high-end line is only four or five months old now.

So it is too early to see -- to see the full effect of it, even though we have very good result.

So we are -- so we are very positive about the future of this.

We will see see next year.

Great.

And also could you -- could you comment briefly on Federal trends in the quarter?

Federal.

I didn't hear the question.

Can you repeat it?

Yes, could you comment briefly on Federal trends in the quarter.

How was the US Federal end of fiscal year for you guys?

From what I have seen in terms of sector, the whole government sector for Check Point remains a large sector and remains stable in the quarter.

I don't have any particular data on the US Federal market.

The few anecdotes that I have is that the Federal Government didn't have much budget in the fourth quarter and actually didn't spend much, but that's on a total basis, if I look at the top of the picture, the government sector operated from Check Point remain stable in the quarter.

Thanks.

Thank you.

Our next question is coming from the line of Katherine Egbert with Jefferies and Company.

Just a couple of quick questions.

First of all, can you just say given the backdrop, you guys are giving a good quarter and really nice guidance.

What conservatism have you built into the model from a financial standpoint to, accommodate the environment.

And second, Gil, a couple of you alluded to M&A.

Can you flesh out -- are there any deals coming?

Thanks.

In today's environment, it is very hard to see how much conservatism we've built.

Yes, we have been careful on the forecast for the fourth quarter and we have expanded the range a little bit.

But on the other hand, the -- as we know in this kind of an economy things can grow in much bigger ways than we anticipate.

So, yes, we try to build a conservative approach, but we also try to build a very realistic approach that is based on the real pipeline and the real forecast that our people have and our people are very positive and their general forecasts are good forecasts, not -- they haven't said yet or I hope we will never have big changes in that forecast.

The second part was--?

M&A.

M&A.

I think we have seen opportunities, but M&A is a long-term thing and we usually do M&A for long term strategic reason, not for opportunistic ways , at least that's our approach at Check Point.

And in an environment like that, two things happen.

On the one hand, there are deals that become more attractive because of the valuation in the marketplace.

On the other hand, everyone becomes a little bit more conservative about the future so things that looked very attractive before, you may be a little bit more careful with that.

So with that, I say that we are looking into several acquisitions.

We do analyze that on a constant basis.

Things may happen in the next few quarters and may not happen, but nothing that I can unfortunately share at this

Okay, thanks, nice job

Our final question today is coming from the line of Sarah Friar of Goldman Sachs.

Please proceed with your question.

Thanks you for squeezing me in, guys.

To Katherine's point.

If you look at -- if I can go to the Americas, kind of the first question you got on the call.

It was down on a year-over-year basis but I understand that's on a tough comp.

Do you expect that the US begins to show year-over-year growth again as we look into Q4?

And then how do you think about America as maybe being a precursor to Europe starting to slow because that is certainly what we have seen with other companies, for example, SAP is reporting today as well and that is very -- the similar trend they saw.

America slowed first and then Europe kind of quickly followed.

So first I do expect Americas to have a good Q4 and to have a Q4 up year-over-year in a significant way.

So that's the plan.

That is the expectation.

And that's what we would like to see.

Again, we are having this week here our management meeting and our American leaders are all confident about that.

I think the differences that we have seen in Europe and -- and in the Americas are -- are happening all the time throughout the years.

The Americas is almost always more -- has the sharper movement and Europe is usually much more stable.

Long term they both behave in similar ways, but when you look quarter over quarter, Europe is almost always more stable and US always usually has bigger swings every quarter.

The other difference is that Europe is not one unit and that's part of what enables the Europe sales to be more stable, but Europe is actually composed of many different countries, the behavior of these countries are different.

And by the way, the investments are different.

So sometimes if one region is not -- is slowing down, another region accelerates, and that is what we are managing and our management team in Europe is doing a very good job in predicting some of that and investing in the right places and they keep doing that.

As I said in this economical environment, you can never be sure about what will the future have, but if I look at our internal forecast US should be up in Q4 and I hope that Europe remains -- remains well.

As I said the European -- that we have has a good forecast and from my material experience, they are relatively -- they are usually very confident and meet their numbers.

They know what we are predicting.

Understood, thank you.

Great.

Thank you.

I would now like to turn the floor back over to management for closing comments.

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

If you would like to speak with management or Investor Relations following the call please contact Investor Relations at Plus 1, 650-628-2050 and we will be happy to take your calls.

Thanks again and have a great day.

Bye-bye.