Check Point Software Technologies Ltd (CHKP) 2008 Q4 法說會逐字稿

Greetings and welcome to the Check Point Software Technologies fourth quarter and fiscal year 2008 financial results.

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

A 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 of Investor Relations for Check Point Software Technologies.

Thank you, Mr.

Meintzer, you may begin.

Thank you.

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, Chairman and CEO, Gary Ungerman, Vice Chairman and Tal Payne, Chief Financial Officer.

We would like to thank all of you for joining us today to discuss Check Points fourth quarter and fiscal year 2008 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 conference call replay will be available through February 10th.

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

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

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

These forward-looking statements may include; our expectations regarding the amount available for repurchase of our ordinary shares, our beliefs regarding the proposed acquisition of the security appliance business of Nokia, including the expected closing date, our expectations regarding our sales pipeline, our expectations regarding the potential impact of market conditions on our business as we move forward.

And our expectations regarding our business outlook for the first quarter of 2009.

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 the purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act.

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

Factors that could cause or contribute to such differences include, but are not limited to, the risks outlined in the press release that we issued today and the risks discussed in Check Point's annual report on Form 20-F for the 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, I would like to turn the the call over Tal Payne, Check Point's Chief Financial Officer.

Thank you, Kip.

Good morning, good afternoon, everyone.

Joining us on the call today.

I am happy once again to begin review of an excellent quarter in what turned out to be an exceptional year for Check Point.

We achieved record quarterly and fiscal year results from revenues, non-GAAP net income and non-GAAP EPS perspective.

Our results, both quarterly and for the full year, came in the high end of our projections as we continued to demonstrate solid growth across all regions.

We continued to see the adoption of our product from new and existing customers throughout this quarter and the 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 equity based compensation expenses, according to FAS 123R, expenses relating to our acquisitions including amortization of intangible;e and acquired in process R&D, impairment to marketable securities in accordance with FAS 115 and the related tax effects of such items.

Keep in mind that the 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 as well as the reasons for our presentation of non-GAAP information.

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

Fourth quarter revenues were $218 million, an increase of 5%, compared to $207 million in the fourth quarter of 2007, and a 9% sequential increase over the third quarter of 2008.

From a geographical standpoint, our revenue growth was led by our enterprise business in the Americas, as well as an increased demand across the Asia-Pacific regions.

Revenue distribution for the quarter was as follows.

America contributed 43% of the revenue, Europe, Middle East and Africa was 45%, and Asia-Pacific/Japan region contributed the remaining 12%.

Our product and license revenue were $94 million.

The highest quarterly revenues for products and licenses in recent years.

This was accomplished while we began shifting more towards subscription based technology programs that deliver recurring revenues.

These programs include our SmartDefense Services and Total Security subscription packages.

Total update, maintenance and service revenues were $124 million in the fourth quarter of 2008.

Representing 9% growth over the fourth quarter of last year and 5% over the third quarter in 2008.

GAAP net income for the fourth quarter of 2008 was $86 million, $0.41 per diluted share.

Non-GAAP net income for the quarter was $106 million, or $0.50 per diluted share.

Both came in at the high end of our guidance.

Primarily as a result of our top line performance and expense control.

From an operating perspective we posted exceptional results.

Our non-GAAP operating margin went up to 55% for the quarter, an increase from 52% in the comparable quarter last year.

This mainly the result of our expense management, coupled with improved strength of the US dollar against our other currencies.

Bear in mind these currency exchange rates are still below their year-ago levels.

Our effective GAAP and non-GAAP income tax rate for the fourth quarter were approximately 18% and 19% respectively.

Deferred revenues as of December 31st, 2008 were $331 million, an increase of $57 million or 21% over December 31st, 2007.

And an increase of $58 million over the deferred revenue balance as of September 30, 2008.

We have maintained our rate of customer renewals at the very high rate for our industry.

For the fourth quarter, our DSOs, days sales outstanding were 82 days, compared to 72 days in the third quarter of 2008.

The increase is first and foremost a reflection of the strong Q4 bookings which were also back end loaded.

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

Our cash and marketable securities balance at the end of the quarter increased to $1.444 billion.

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

During the quarter we recorded a write-down of $8.9 million, to reflect a charge of other than temporary impairment in accordance with FAS 115.

This reflects non-cash adjustments to the current valuation of certain investments.

So far, all the issuers of the securities included in this group are paying the interest on the debt as committed.

During the quarter, we purchased approximately 3.4 million shares for a total cost of $67 million, as part of our share repurchase program.

Moving forward, we have approximately $234 million remaining from the $400 million plan approved by the Board in 2008.

Let's take a look at our 2008 fiscal year highlights.

For the year ended December 31st, 2008 revenues were $808 million, an increase of 11%, compared to $731 million for the year ended December 31st, 2007.

Our double-digit revenue growth for the year is reflective of the continued customer demand for our products, despite difficult economic conditions.

We believe our success can be attributed to the quality of our products and the mission critical nature of the security products in general.

GAAP net income for 2008 was $324 million, an increase of 15% compared to $281 million for 2007.

Non-GAAP net income was $386 million, an increase of 8%, compared to $359 million last year.

GAAP earnings per diluted share for 2008 was $1.50, an increase of 20% compared to $1.25 last year.

Non-GAAP EPS for the year was $1.78, an increase of 12% compared to $1.59 for 2007.

On the operating side, this year was an unusual year.

The dollar has fluctuated against many other currencies and resulted in a headwind that reduced EPS in the first half of the year.

While in the second half of the year, the trend turned, it was still below the year-ago level.

We also had more appliance in our product mix which increased our cost of goods sold.

Despite these challenges we were able to achieve a non-GAAP operating margin of 53% for the year, up from 51% last year.

This was as a result of our focus on efficiency and productivity, but driven mainly by the higher revenues we achieved during the year.

Now, let's turn the call over to Jerry for some color on the fourth quarter and the year end.

Thank you, and good morning to all of you joining us today.

2008 turned out to be quite a year for Check Point from a financial perspective, as Tal has explained, and I am very proud of too.

Now, I would like to speak to you a little about what made our impressive financial performance possible.

The underlying key to our success has and always will be delivering security products that address the needs of our customers.

What has allowed us to achieve the success to date is our Total Security strategy and our unified security architecture, which makes it possible for Check Point to deliver a unified line of security gateways that are designed to address the needs of our customers, by providing them with an open choice of software solutions that can be delivered on a customer's own hardware, a partner's hardware, or as a Check Point appliance.

In addition, we also introduced the industry's first virtual environment security gateway, this year, called the VPN-1 Virtual Edition, which is designed to address the special security needs of virtual environments.

Regardless of the size of the organization, we have a unified security gateway to address their network security needs.

In the fourth quarter, we announced an agreement to further expand our network security gateway strategy with a proposed acquisition of Nokia's enterprise security business.

As a result, once the acquisition is completed, Check Point expects to be able to provide customers with an expanded line of integrated security solutions with a single source for development, delivery, and service for their entire security solution.

The acquisition is expected to close in the first quarter of 2009.

We also delivered another industry first during the year, with the introduction of Check Point's single agent for Endpoint security which provides VPN, remote access, NAC or network access control, firewall, program control, media encryption port control and data protection, with our industry-leading full disc encryption with preboot authentication.

The introduction of our single agent for Endpoint security provides us with the ability to deliver a comprehensive security solution to our customers that spans the network, end points, and even the virtualized environment.

These security products are all designed to work in harmony together, utilizing our single management console, which provides our customers with the ability to manage their complete Check Point security infrastructure from a single console.

Our management console has become a compelling aspect of our Total Security strategy, as customers look to reduce the complexity and costs of their security infrastructure, while maintaining the highest levels of security.

Throughout the year, we have continued to expand our partner ecosystem as we have continued to develop relationships with partners worldwide to enjoy the benefits of selling our expanded security portfolio.

To date, we are encouraged by the results of our efforts worldwide, but especially in the emerging markets of Asia-Pacific, Latin America, Eastern Europe, and the Middle East, where we experienced double-digit revenue growth for the year.

During the quarter, we saw an increase in the percentage of larger deals, which was reflective of the trend for the whole year.

This is a result of many of our larger, established customers, standardizing on Check Point security products, as well as larger customers we have acquired through competitive wins.

As such, transactions greater than $50,000 accounted for 56% of total order value, compared to 46% a year ago.

During the quarter, there were 22 customers that each had transactions with value greater than $1 million, coming from both network and Endpoint security products.

In conclusion, I would like to highlight one interesting item.

This is Gil's 50th earnings announcement with Check Point and I hope you will all join me in congratulating him on this milestone.

With that I will turn the call over to Gil.

Thank you, Jerry and I would like to thank all of you for joining us today for another successful quarter for Check Point and my 50th earnings announcement.

I really hope that we can generate as much success in the coming quarter.

As for 2008, first it's nice to have record results, $0.60 per share for our 50th earnings announcement and in general you can see that our financial performance for 2008 turned out to be quite exceptional by all standards.

When we look ahead to2009, to expect to have a busy and productive year.

However, we can't [belever] the state of the economy and the potential effect it may have on us.

Therefore, we need to be careful when trying to plan and forecast 2009.

It also means that the level of risk in any forecast we will make will be rather high.

Having said that, I believe that Check Point is well-positioned to enter this new year.

We have what we believe is very strong technology road map and expect to make some important announcement regarding innovation in our core software.

We're expanding our appliance product lines with new models and expect to expand significantly with the addition of Nokia security appliance business when we close the acquisition.

We also expect to release more product in more security areas during the year.

All of these activities should contribute to the success of Check Point and has a long-term effect on our performance and are also well balanced between things like appliance announcement that can help in the immediate impact on results to more long-term innovation.

Keeping in mind, though, that in a period like 2009 it will be hard to know what will impact the business more, our execution and technology or the economy.

This brings me to the financial outlook part for 2009.

As we look to 2009, it's clear that we are well positioned from a product standpoint as well as from the operations perspective.

These unique positions, will allow us to emerge from the current economic uncertainty in an even better position than we entered it.

[Our sell the most] will continue to have healthy pipeline and forecasts for the first quarter, but we've been in a change in our business -- with our business about to go through, upon the completion of the Nokia acquisition, combined with the uncertainty of the economy, it would be pretty much our choice to make revenue for the entire year.

So I'll focus right now on the first quarter.

For the first quarter, we expect revenues to be in the range of $190 to $208 million and non-GAAP EPS to be in the range of $0.40 to $0.46 per share.

Now, I'd like to open the call to you questions.

Thank you very much.

Thank you.

Ladies and gentlemen, we'll now be conducting a question-and-answer session.

(Operator Instructions).

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

Please state your question.

Hi, thanks for taking my questions.

Gil, I was wondering if you could give us a little bit of color around the Nokia acquisition, specifically if you could drill into what's your plans around headcount?

Do you anticipate bringing all those people over?

And then maybe talk a little bit about how you're going to structure the sales force going forward.

Thanks.

First, we're just starting now to have the plan for the acquisition of Nokia.

When we announced the deal about a month ago, our focus was on closing the year and now as we enter into the first -- into January, we are now just now developing the plan.

We haven't finalized anything.

But just to give a little bit of background, the Nokia security appliance business has today about 450 employees and some more contractors.

The combination of contractors and outsourcing.

We do expect the vast majority of these people to join Check Point, but we are now planning and seeing exactly which functions we will need and at what scale and what scope.

So that's the general plan.

We also expect to sell all the Nokia appliance line to keep sales top, produce all the product lines that we have.

These are good product lines and Nokia today is a very up-to-date appliance lineup and most of the models that are being sold today are relatively new models that are on the latest versions in terms of processors and performance levels and so on.

So the near term, customers can expect full availability.

support for all the products, in the near term, also in the long term.

And moving forward, what we will do between 2010 and 2011 is every time you release a new appliance model, because keep in mind that if you look at all the Check Point product line, which is also brand-new for us.

All the models that we have right now were announced in 2008.

They are all with the latest chip set and latest technologies on them and deliver very good price performance.

In the short-term, we expect to be full speed ahead in delivering all these products.

Once we move forward, every time we will refresh or come up with a new model to complement this lineup of products, we'll come up hopefully with a unified product because moving forward the expectation I think for everyone is that we will have a single appliance product line from Check Point.

Maybe as a quick follow-up, Gil, is it safe to assume or consistent with your prior comments that you expect the acquisition to be accretive upon closing?

We expect the acquisition to be accretive, accretive this year and accretive I think.

There are a few accounting issues and so especially on a non-GAAP basis, there are a few accounting issues that might for example, depending on the timing of the closing, it may not be accretive the first month, maybe not the first quarter even.

That depends on how much things like deferred revenues we'll be able to recognize, things like that.

Overall the expectation that is the deal would be completely accretive to us in 2009.

Great.

Thank you.

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

Please state your question.

Hi, guys.

Just a couple quick questions.

First, Gil, when you do look at the Nokia business, obviously very hardware weighted.

Wonder if you could give us a sense for the gross margins there because obviously there's also that larger current component.

But then also, when you think about operating margins for Check Point, really more just operating expenses, when you think about 2009, how should we expect just operating expense trends, ex the additional headcount from Nokia?

Actually, pretty good opportunities for us.

Certainly I think we will have some work and a lot of opportunities to be more effective and more efficient on the producing appliances.

And now you can see, based on our experience in Check Point, we've been asked that question many times, now that you're shipping more appliances won't that hurt your operating margin and you can see that we finished 2008 with better operating margins than we had in 2007.

And the same thing for the fourth quarter, 55 compared to 53% operating margin for the quarter and 53% for the year, compared to 51.

So you can even see the more we sell and the more we sell appliances, so far our margins keeps growing, not shrinking.

That's not just because the appliances but that's because of many other things we do in the business.

This is just an indication that we're not -- I don't want to create the impression that our margins will keep growing but this clearly shows that there is not necessarily a link between the amount of appliance sales to the overall margins.

And, to reiterate the point that our focus is on growing the top line and bottom line, not about managing what's already I believe the industry best operating margin of any Company.

And with Nokia, it's actually quite interesting for us because especially in the current, in the uncertainty with an economy like this, when we enter 2009 and Nokia provides us with a very good additions to our team.

In this environment, it would be hard to justify, for example, hiring another 150 or 200 people in our field operations.

With the acquisition of Nokia, on one hand we don't get to make this big investment in uncertain economy.

On the other hand, we do get 200 people that will join our field organization worldwide, roughly 200 people.

That already know the business, know our customers, know our products and that come, bring with them positive results.

So this is actually going to be a good thing for us in terms of growing the business.

Obviously, in the first year, it will have an impact on the operating margins, especially if we won't be able to recognize the entire business that we get from Nokia.

And especially the deferred revenue from that, so it will have an impact on the operating margin.

As I said, it should be for the year positive on the bottom line and positive on the other parameters.

Great.

Thanks.

Our next question is coming from Walter Pritchard with Cowen & Company.

Please state your question.

Thanks.

Just two questions here.

First Gil or I guess Jerry around the channel programs, I know Nokia had a distinct channel program.

Is it sort of a "stay in your lanes", just kind of keep the existing channel program going with Nokia?

Any detail around that would be helpful.

And then I had one follow-up for Tal.

Not yet.

We're working on all that.

We're working great.

I think there's a lot more similarities than there are differences.

As Gil said, the great thing about this is we're getting some very experienced people with existing partners, with existing customers.

They know our software.

We know their hardware.

They know ours.

So it's very synergistic in what we're doing and we all work through the same partners out there and we have relationships with them.

So we'll continue to work in the best of the both and I think everybody is very pleased with it right now.

They're very excited about it and anxious for us to close it.

So I'm optimistic that it will continue to flow the way it has been.

And then Tal, just on operating expenses you made the comment about currency which is a bit complicated.

But if you could simplify down and tell us what the impact was on operating expenses for the entire year in '08 if the currency were the same as '07 and also what the impact was in Q4 if the currency was the same as what it was in the December '07 quarter?

In the fourth quarter, the effect was around between $0.01 and $0.02 and I think for the entire year it's a negative $0.02 or so.

Great.

Thanks a lot.

I think overall for the year, just to give you our expenses were let's say higher by roughly $20 million, if we use the same currency exchange rates that we're seeing in 2007.

We do ask callers to limit yourself to one question.

Our next question is coming from Shaul Eyal with Oppenheimer.

Please state your question.

Thank you for taking my question.

Congratulations on a good quarter.

Gil, one quick question on my end.

I kind of keep asking you this question every time you make an acquisition, I certainly asked you that last time on Pointsec.

Again, already with the number of acquisitions under your belt, and obviously with Pointsec being an entry into a new domain, what is kind of the comparison, contrast about the Nokia and probably the Pointsec acquisition?

What are you taking with you on the good side from Pointsec and importing into Nokia and what are kind of the points that need to be improved, having Pointsec close to three years with you guys?

I think we learned a lot and we are learning all the time about how to make better acquisitions.

But Nokia and Pointsec are very different.

Pointsec was entering a new domain for us and that was very important and I think still very important and still one of the most promising sectors that will be complimenting our Endpoint security offerings and expanding the Endpoint security business.

Nokia on the other hand plays directly into our core market and we already have pretty sizable appliance business so it's not even shifting the business, it's more augmenting it.

Keep in mind that Nokia sells 100% to the same channels that we sell to, 100% to the same customers and 100% the same products that we already have in our lineup.

And so that's quite different in what it does and again, we try to different augment qualities.

I think one of them represents a different potential and a different quality to the business.

I think one thing we're learning, learned in every acquisition, that we should move faster and make more changes more quickly.

I think we did a lot of, I think with Pointsec we were pretty good about that and we made a lot of integrated the business into Check Point right away.

With Nokia we hope to be even faster around that.

And what else can I say about the major -- this is probably the major lessons which we've learned.

I think we will need to be very sensitive to the challenges and to the customer needs and I think we know all of that and we will keep that in our mind.

Overall, the feedback we got from customers and partners is 100% positive on the Nokia acquisition.

So I think we will -- it should be very positive as we move forward.

Do you think you're going to be in a position post the acquisition, assuming it closes within the next eight weeks or so, to provide annual guidance?

I hope so.

I hope that once we get into March or April we will be able to provide -- to better share our plans for the year.

But again, we'll see based on that, based on the economy, there's a lot of moving parts.

And by the way, I mean, we're all very concerned about the economy and I think for good reason.

But so far what we've seen is that the world continues to revolve and our business was pretty good.

So I don't want to sound like I know something that you don't know about the business of ours, about the economy.

Actually, the main thing that may worry about that is that so far inside Check Point, our forecasts are positive, our customer reactions are positive, so we actually don't see big warning signs about the economy and that actually what makes us a little bit more concerned.

If we were to have today plans with our difference, based on our forecast in the field, we would have shared them right away.

So you can see our forecast right now and plans are very consistent with what you knew before.

There's no inside Check Point, there's no major changes in plans because of the -- because of what we've seen so far.

Thank you for that.

Our next question is coming from Daniel Ives with Freedman, Billings, Ramsey.

Please state your question.

Yes.

My question is just on the appliance upgrades, where do you think you guys are in terms of penetrating the installed base on the appliance side?

Very low.

I mean, I'll just throw a few numbers.

I believe -- I don't have the exact number, but we sold in the past year in terms of enterprise appliances, the biggest lines, not the small ones, well over 10,000 appliances.

Which is, by the way, quite impressive number for like the first few years that we are in this business and so on.

But just to give an estimate, our high end software licenses business includes today close to half a million gateways.

And if you just look at Nokia, Nokia shipped to date 220,000 appliances, most of them are enterprise or high end appliances.

So if we look at the renewal cycle, that says that every four years or for instance from three years to five years renewal cycle, you can clearly see the potential is probably between five to 10-fold of what we've done.

And that means that we are relatively in an early position in the cycle, in the appliances.

Okay.

Thanks.

Congrats.

Our next question is coming from Garrett Becker with Banc of America Securities.

Please state your question.

Hi, thanks for taking my question.

Gil or Tal, just wondering if maybe you could walk us through the guidance a little bit.

I know it's early in Q1, but maybe you could just give us some color on the assumptions, either in terms of vertical contributions or geographic contributions?

And also maybe how you're looking at your pipeline and close rates as you set your guidance for Q1?

I don't think there was any -- too much guidance we can give you into that.

Our sales organization all over the world continues to have positive plans for the year and actually we just met with them the last two weeks we had our sales kick-off meeting one and last week for Europe and Asia and two weeks ago we have a sales kickoff for the US.

Very surprisingly or not surprisingly because we had good results, I never met a sales force that was so optimistic and energetic and positive in all the salespeople in my history in Check Point.

And even the surveys that we did for the sales force showed that when you rated the material that they've seen, what they're having on hand to sell at the highest levels for many years.

So on one hand, we have on one side a sales force that is very positive and generated good results.

On the other hand, we have an economy with a lot of uncertainty.

Some people will say that yes there's a lot of demand for security and people will buy more security.

But at the same time, if you know the environment better than I do, but we also know that some companies may have new budgets for 2009 and 2008 they're operating under an older budget.

Some companies are using this economy to save costs, which is also very natural.

So we have to be sensitive to that and we can't ignore that.

So we are planning for organic growth in terms of quotas and the sales plans that we have.

In terms of operating expenses, we think that we can achieve some savings next year.

On the same time, we do want to recruit a few new positions and to expand new areas.

Because of the Nokia acquisition, I believe that most of the new hires that we would need to do would actually come from Nokia.

I mean if I was debating before the Nokia acquisition whether we need to recruit 30 people or 80 people to our sales force worldwide, now that we get between 150 to 200 people from Nokia, they will fill most of these positions, except maybe in places that are really, really unique and exceptional.

So this is kind of some of the thinking that we have around that.

I'll just add one comment.

The way we provide the forecasting or the guidance is based on the same way that we always did, which is coming from the bottom up from the field and being judged throughout the management channel.

I will say that the reason why we provide a wider range is to reiterate the gap that can be between the high end and the low end, depending on macroeconomics that we can't foresee at this point.

I mean I will share one division that is a [plus] quarter.

Every quarter, like every technology business and every software business, the business tends to be back end loaded and even more back end loaded.

Every quarter towards the end of the quarter and we become more and more nervous and every quarter so far back you can look at our history and I think for 50 quarters we had excellent quarters.

And almost all the quarters we finished, after making the plans and so on, but every quarter we get a few calls at the end, even though we go back to the field and we check the forecast and so on and so forth.

Every quarter we have some regions or some deals that fall through and even though up to like December -- first year for December 31st we were in the pipeline that fall in the last date.

This quarter is even more back end loaded.

And on December 31st we were very nervous, about especially with the economy, especially with being so much back end loaded and we waited to see which deals will fall and which regions will have better prices.

Interestingly enough, we didn't many this quarter.

We actually, I don't think we had any.

All the forecasts we had for all regions were met.

All the large deals that should have come, came.

So I think we actually had pretty good execution as we closed that quarter.

Now, again, 50 quarters as a public Company, and doing this for 50 quarters, I know that what happened last quarter may not be indicative of what will happen next quarter.

I just want to be clear that we're not -- the uncertainties built into where we are in the world.

It's not built into what we've seen at Check Point.

Actually, closing Q4 which was, again, the most back end loaded, the strongest quarter, the quarter with all of the things that should have made it risky, was the smoothest end quarter close that I remember for the past few years.

So that's kind of contradicts with everything else that we're seeing in the economy.

But it was a reality.

Just to give you some light on what I've seen.

Excellent.

That's great color.

Thanks.

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

Please state your question.

Good morning, guys and congratulations on a good quarter.

Just thought I'd ask, you guys have $1.44 billion in cash now.

Do you guys plan on accelerating the stock repurchase or potentially using your cash for anything else?

I would ask for a little bit of color on that.

I don't think that we know at this point.

We haven't decided on the -- I mean right now, we still have a lot of money in our share buyback program.

We haven't decided on the growing or shrinking at this point.

At this point I think we're well-balanced.

On one hand I think we believe in our future and it's a good opportunity to use the cash in buy back.

On the other hand, there's more opportunities to acquire businesses in the market.

And there may be even more opportunities moving forward so we may want to preserve the cash for other types of expansions that would be more meaningful.

But at this point I think we're operating under a [portico consensus].

We'll keep the buyback program but we're not going to make a significant policy changes at this point.

Every few quarters, suppose we review the plan and revise it.

This quarter we haven't done any revision so far.

Alright.

Thank you, guys.

Our next question is coming from Sterling Auty with JPMorgan.

Please state your question.

Sterling Auty, from JPMorgan, your line is live.

Okay.

Then we'll take our next question from Katherine Egbert with Jefferies & Company.

Please state your question.

Hi.

Good morning.

Good afternoon.

For those of us who followed the Company for a while, your sort of pattern of M&A over the last few years has helped you quite a bit.

But was a big break from what you had done in the past.

I guess my question is going forward, will Check Point become a Company that serial acquirer where you make an acquisition, say, once a year, of size?

Thanks.

The short answer is yes.

The long answer is I don't know.

I mean, it's -- our plan is to grow and part of growth is for acquisitions.

I think we started to learn how to do it and we're very focused on that.

But the main -- but for the long answer, the main focus of what we have is doing what we're doing or -- in a healthy way, in the right strategic way, complimenting our region and not do acquisitions for the sake of acquisition or for the sake of making up numbers.

The sake of the acquisition is something that will fit our strategy, that has the right price to it and that really really resonates with our customers and partners.

And these are not easy qualities to find because we are serving a very, very large community of customers of all sizes, of all types.

And it's really not hard to find technology products that fulfills such a broad market as opposed to niche companies that serve small, very small segments.

So that's the main difficulty in finding these expanding areas and these expanding products.

In the last two years, we were able to find one every year, one large one, Pointsec and Nokia.

I hope that we will have more of these.

Okay.

Thanks, Gil, good job.

Our next question is coming from Sarah Friar with Goldman Sachs.

Please state your question.

Good morning, everyone, thanks for taking my question.

Gil and Jerry, with your many years of experience, would just love to get a little perspective from you on the current environment.

Clearly, when we went through the last downturn, security was the massive outperformer, but it was a underpenetrated base in a way.

This time around I would love to understand your sense of is there still enough underpenetration to keep the industry relatively healthy in a downturn?

And what are you hearing when you go out to customers in therms of their need to still keep upgrading their security architectures?

Why don't you go ahead first, Gil.

I would say that generally -- I wouldn't call the security industry at this point underpenetrated.

I hope that it is.

But I mean that's not the indication that I'm getting.

What I do see is that a) people do need security and it's critical.

People don't take out security products for cost savings or for anything.

If you're network gateway is slow you upgrade it because keeping up the network for sliding and rounding is much more important than the cost it will have.

But secondly, and this may relate to your comments about penetration, security -- IT budgets are still very, very small compared to the overall IT budgets.

That's not necessarily good news for us because we would like to see the budget grow but it is good news from the standpoint that we have a lot of room for growth.

I mean we are not a big portion of any companies IT project and therefore we are not the first in line to be cut.

And we are and companies can justify growing the investment for something that is on one end is very critical for the infrastructure and on the other hand -- and on the other hand is not that expensive overall.

I think Check Point's unique value proposition is that we will provide in the next few years customers with the ability to consolidate multiple purchases with us and achieve both operational and also purchasing savings in a pretty big way.

The way we will do that, that one thing important to our lives and also keep in mind that because we are providing critical infrastructure, there's always a product cycle refresh.

I don't think it's a one-time product cycle like 2008 or 2009 is a one-time product refresh cycle but even ongoing refresh cycle, and especially now with doing more and more appliance.

We will take a much bigger piece of that refresh cycle which in the last five years we were very small portion of and represented a big part of specifically the firewall VPN markets.

So these are all the elements that should help us in the future.

I would just add a little bit to that.

I agree with what Gil said.

I don't fully relate to the penetration comment.

I think I understand what you mean.

But it's both in an absolute sense as well as relative, relative to the threats today, relative to the environment people are in, relative to the use of the Internet.

It's so much greater today and dependence on it than it was back then.

Yes.

So I mean, people need to keep on adding new.

That's why we bring on new technologies, new functions, new features, new capabilities to protect them in 2009 that they weren't worried about in 2003 or 2004.

So there is need for this new product, this new capability that we're bringing to market through our Total Security strategy and the unified security architecture we have.

So I think we're really well positioned.

I think one of the reasons we did so well in the fourth quarter as we said is because we're doing very well against competition.

We're getting a lot of competitive wins, displacing products, single management console, the cost, the effectiveness of broad product line from Check Point is very compelling.

It doesn't mean we're going to be immune from anything or impacted by it.

I mean, that's the unknown.

That's what Gil mentioned.

It's just that our salespeople right now see a strong pipeline, a lot of activity, a strong forecast.

But will that materialize because of the economic crisis?

We don't know, which is why there's reason for caution there.

But we are very optimistic about where we stand and what the customer's doing and what the customers need.

Sure.

That makes a lot of sense.

Tal could I ask one very quick not type question on the tax rate.

Could you give us any sense for the full year fiscal '09 of where the tax rate should go because I know it jumped around a little but is 19% a good rate to think about?

Yes.

I don't see reason at this point to change it for this rate.

Great.

Thank you.

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

Please state your question.

Hi, guys, nice quarter.

Can you guys address the competitive landscape?

And your growth profile has been very nice here.

How much of this is kind of competitive share gain versus organic market growth and how do you see the landscape changing as you guys buy the Nokia appliance side?

I think so far it's well-balanced.

We had few -- we had few competitive wins and competitive replacements.

We have offered it to existing customers, we have expansion to existing customers and we even have refer now.

Refer cycles with existing customers.

I don't know what impact is exactly but overall in the business I think it's very well balanced between all three factors.

Our next question is coming from Rob Owens with Pacific Crest Investments.

Please state your question.

Yes.

Thank you.

Realizing you no longer break out appliances as a percent of license sales, can you give us any color just in terms of either sequentially or year-over-year, are you still seeing that trend increasing?

Yes.

For the annual appliance portion out of the products was 37% which is an increase from the 22% that we've seen last year.

SO pretty much almost doubled the scale.

And then second, on the deferred revenue with all the strength sequentially, was there much unshipped product in there or is that largely maintenance?

The majority of the deferred revenue is relating to the services, although we are starting to see some increase in the portion of the long-term contract.

One thing to remember when we are talking about the deferred revenues, most of is this is support and subscription software update models But we have an ever-growing part of what we call online services or software services in it.

So we have our SmartDefense service, that is actually pretty sizable today.

It's about I would say $55 million a year, like software, like security updates on demand business that we tend to grow further.

We started offering some -- we have the Total Security package which is part of this and that provides many other types of security updates to customers which we're promoting more and more.

We've started offering customers last year the ability to build our products on the paper and model side, which generated a couple of million dollars for us.

And again, you haven't seen that in the financial results because we actually showed up in the deferred revenue the last portion because that's something that we just -- that we just look at it on a month by month basis.

So we have 36 quarters, 36 months contract, three year contract, like say for half a million dollars, what you see is $10,000, $15,000 every month for $60,000 every quarter, which is not huge on the quarterly basis but if we look for the overall contract value, it would have been half a million dollars and we have a few of them.

So we are moving more and more and we will keep doing that smoothly, not in a disruptive way to the business, to move customers to an annuitive based model.

I think it's good for us, it's good for customers and we are trying to build this business model as the business moves forward.

Great.

Thank you.

Our last question is coming from Michael Turits with Raymond James.

Please state your question.

Hi, guys, thanks very much.

Just to come back, a couple questions, come back to Nokia.

First off is there any contribution to revenues or from expenses from Nokia in your first quarter guidance?

No.

Okay.

We may find ourselves with some, probably not very big, but right now in the guidance we haven't included any.

Okay.

And then secondly, you've done a great job with getting very attractive margins out of your own appliance business.

Can you contrast at all what, as you pick up the Nokia business, what the gross margins and the operating margins are each like on the Nokia business, as compared to what you're getting right now in your own appliance business?

I don't think that we can share much, especially because Nokia doesn't want us to release any numbers.

I can tell you in a very general sense is that the Nokia business today, the way it operates is a healthy, profitable business, more than even we thought before when we looked at into that.

Second, it doesn't have the Check Point margin, it has much lower margins.

And I think that true ups opportunities we will have.

On the one hand they could be [with their efficiencies ] .

On the other hand, start to move that business to our standards and leverage some of the things that we're doing and driving more margins out of it.

In the short-term, let's keep in mind that because of some of the transition, it will have a big pressure on the business margin in the beginning.

Longer term, I think there's no reason that the Nokia business should not move to something close of the Check Point appliance business.

I mean the underlying architecture, the underlying software and other architecture are very, very similar, so there's no reason there should be a big difference between these two businesses as we look a few years down

Can you give us a rough sense, in other word, what we think the operating margins are something we could double or raise by 50% there?

I think we can improve significantly.

Again, it won't be overnight.

Because it's a good business, I would just say that.

If it was a bad business, it was a very easy decision to cut product or cut product lines and trim service into others.

Because it is a very good business and customers actually love these products and they're high quality products we're not going to make big, disruptive changes overnight, but we're going to slowly make it more efficient, more effective.

And as I said with new appliance models that we will roll out in 2010, 2011maybe even some in 2009, these appliances will already be unified, having the best technologies and the best innovation from Nokia and Check Point and hopefully having more of the cost structure of Check Point than of Nokia.

Thank you.

This does conclude the Q&A session.

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

I'd like to thank you guys for attending the call.

The sell side folks that would like to call back or buy side, please just pop me an e-mail and we will catch up.

Thank you guys and we'll be talking to you soon.

Have a great day.

This does conclude today's teleconference.

You may disconnect your lines at this time and we thank you for your participation.