Check Point Software Technologies Ltd (CHKP) 2009 Q1 法說會逐字稿

Greetings, and welcome to the Check Point Software first quarter 2009 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, 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 first quarter 2009 results.

As a reminder, this call is being webcast live on our website and it's 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 May 11th.

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 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 beliefs regarding protection to related to the acquisition of the security appliance business of Nokia.

Our expectations regarding our sales pipeline, our expectations regarding the performance and customer acceptance and adoption of our products, our expectations regarding the potential impact of market conditions on our business as we move forward and our [intracations] regarding our business outlook and results for the second quarter and full year 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 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, 2008, which is on file with the Securities and Exchange Commission.

I would also like to point out that these forward-looking statements are based on Check Point's expectations and beliefs as of the date hereof and that Check Point assumes no obligation to update its forward-looking statements.

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

Thank you, Kip.

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

Before I delve further into the numbers, let me remind you our first quarter GAAP financial results include equity based compensation expenses according to FAS 123R, expenses related to acquisitions,including amortization of intangibles and the related tax effects of such items.

Keep in mind this 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 these data, as well as the reasons for the presentation of non-GAAP information.

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

First quarter revenues were $195 million compared to $192 million in the first quarter of 2008.

These represent the best results that Check Point has ever posted in first quarter of the fiscal year and it's within the range of our guidance.

Revenue distribution for the quarter was as follows.

Americas contributed 43% of the revenue.

Europe, Middle East and Africa, was 44%.

Asia-Pacific and Japan region contributed the remaining 13%.

We have seen healthy growth in our enterprise business in Asia-Pacific and Latin America region, with North American and EMEA remaining stable.

From a deal size and quantity perspective, this quarter will continue to see an increasing number of larger deals.

Transactions greater than $50,000 accounted for 44% of total order volume compared to 39% in the same period a year ago.

We had 13 customers that each had transactions with a value greater than $1 million compared to 10 in the year-ago quarter.

Product and license revenues were $72 million for the first quarter of 2009 compared to $77 million last year.

We believe that the change occurred primarily as the result of global economic slowdown and the decline occurred mainly in non-core product line.

In our core network security appliance business, we saw between 30 to 80% year-over-year growth rate depending on the product line.

Total updates, maintenance and service revenue were $123 million in the first quarter of 2009, representing growth of 8% over the first quarter of 2008.

The growth was across all regions.

But in operating perspective, we posted exceptional results, our non-GAAP operating income increased 11% from(Sic-see press release) $109 million in the first quarter of 2009 to(Sic-see press release) $98 million in the same period in 2008.

Operating margin was 56% for the quarter, up from 51% in the comparable quarter last year.

This is primarily as a result of operational efficiencies and continued strengthening of the dollar.

GAAP net income for the first quarter of 2009 was $81 million, or $0.38 per diluted share.

Non-GAAP net income for the quarter increased to $95 million, or $0.45 per diluted share, up from $93 million, or $0.43 per diluted share in the first quarter of 2008.

Earnings per share came in at the high end of our guidance representing 6% growth for the first quarter year-over-year.

Our effective GAAP and non-GAAP income tax rate for the first quarter were 20% and 19% respectively, consistent with our guidance.

Deferred revenues as of March 31st, 2009 were $325 million, an increase of $47 million over the deferred revenue balance as of March 31st, 2008.

We have maintained our rate of customer renewals at very high rates for our industry and have begun to realize increasing multi-year on year orders.

For the first quarter of 2009, our DSOs, day sales outstanding, were 81 days compared to 82 days in the fourth quarter of 2008.

While we saw a decrease in DSO during the quarter, our business remains back end loaded as we have indicated in previous quarters.

We generated a record cash flow from operations of $172 million, an increase of 20% compared to Q1 last year as a result of strong cash collection and strong operating discipline.

We ended the quarter with approximately $1.6 billion in cash and investments.

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

During the quarter, we purchased 2.3 million shares for a total cost of $52 million as part of our share repurchase program.

Moving forward, we have $181 million remaining from the $400 million share repurchase program approved by the Board in 2008.

I would like to remind you that Nokia Security Appliance financials are not included in this quarter's results, as the transaction closed mid-April.

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

Jerry, please go ahead.

Thank you, Tal, and hello, everyone.

I would like to begin on a personal note.

Four years ago I announced the beginning of a transition from being Check Point's President to being an executive without day to day management responsibility, but still involved operationally.

I also became a Vice Chairman of the Company.

At this time, I will be completing the transition and as a result, this will be my last earnings conference call.

I have really enjoyed this aspect of the role and the relationships I have built with many of you over the years.

However, I will continue as Vice Chairman of the Board and in this role, I will continue to support Check Point and its team as needed and will remain an actively involved Board member.

I am very pleased with the state of our position in the market, as I complete my personal transition at this time.

We have just delivered our new software blade architecture, allowing customers to realize the highest levels of security from a flexible and manageable platform.

The software blade architecture is a combination of what our customers and partners have been requesting in a security platform.

One of the compelling attributes of the software blade architecture for customers is the ability to tailor security to individual gateways rather than having to adopt a one-size-fits-all approach.

By utilizing the blade architecture, customers have the ability to select desired security software blades for specific location or application of a security gateway.

And additionally, they can increase or decrease software blades as conditions require.

This is desirable from a customer standpoint because it provides the ability for a customer to determine and address their exact security needs as those needs change over time or as new software blades become available.

This level of extensibility is unmatched in the security industry and we believe our focus on security will continue to be a driving force behind customer selecting Check Point as their primary security vendor in standardizing on our total security solutions to address their needs.

But as important is the total cost of ownership we provide.

This revolutionary new approach makes it much more economic for a user to fully secure their network and can even save money today by incorporating our new solution while displacing a number of older technologies whether their acquire our software and put it on an open server or buy one of our many new appliances utilizing this new software blade architecture.

Finally, we have now completed the acquisition of Nokia Security Appliance business, further positioning the Company for continued leadership from a product and financial perspective and we are posting year-over-year growth and record first quarter results in a very challenging environment.

These are achievements that any Company would be proud of.

With that, I would like to thank all of you for your continued support of Check Point.

Now I would like to turn the call over to Gil for one last time.

Last time for me, that is, but not Gil.

Thank you, Jerry.

It has definitely been a very good 11.5 years and I'm actually looking forward to many more years that we will work together and I'm sure that everybody will miss your presence on these calls.

But I would also like to begin by thanking all of you for joining us today.

As you just heard from Tal and Jerry, the first quarter record results and our new product introductions have provided us with good beginning to the year.

We began 2009 with two big milestones.

We launched our R70 major software version featuring the software blade architecture and we've just completed acquisition of the Nokia Security Appliance Business.

In the software blade architecture had threatened the already leading security software and continues to raise the bar by delivering the industry only unified security architecture.

At the same time, we're strengthening the platform on which we software redeployed and now we believe we also have the industry's broadest and deepest supplier's product line that delivered the best choices and price performance for customers of any size.

Combining these to two show that you can get the best security software on the best platform with no sacrifice in security for speed or reliability.

With the Nokia acquisition we just added about 300 new people at Check Point mainly in sales, product development and technical services.

Following the completion of this acquisition, we now have approximately 2200 people in total head count.

And the Nokia IP appliances will join our [team one and power one] security appliance line as the Check Point IP appliance with integrated software services and hardware.

We intend to sell, support and service all product lines, as each one of them includes some unique features and benefits and enjoys a loyal enthusiastic installed base.

However, we do treat our entire appliance business as one and we will offer our customers more flexibility in selecting solutions as we are monitoring the Nokia business and will offer all product in the unified business manner.

As for our financial results, I'm very proud to show results and our outlook for the year, especially at this time.

During this challenging economic times, we have seen so many companies reporting declines in their business below year ago revenue, and I am very proud to see growth across our results.

While there continues to be a high level of uncertainty around the economy and its impacts on any business, we continue to be encouraged by our outlook for the rest of the year, which I'm going to share with you now.

Before I provide the numbers, here are a few points about the assumptions in our financial projection primarily related to the acquisition.

First, we completed the acquisition of Nokia Security Appliance Business on April 13th, so not all of Nokia's second quarter results are going to be included in our projection for the second quarter.

Also, we won't recognize a big portion of Nokia's service revenues due to the purchase accounting rules for deferred revenue throughout the year.

Since we only report one revenue number, these deferred revenues will not be recognized or seen in our financials.

Also, starting in the second quarter, we're going to include additional transaction restructuring expenses in our GAAP results.

And keep in mind due to the uncertainties around the economy and we will use some of the projections from the acquisition to offset [risks] in the marketplace and this will be reflected in a wider forecast rates.

So we are -- our projection in non-GAAP that excludes equity-based compensation and acquisition-related charges.

For the second quarter of 2009, we expect revenues in the range of $205 million to $230 million.

Non-GAAP EPS is expected to be between $0.41 and $0.49 a share.

For the full year of 2009, we expect revenue to be in the range of $860 million to $920 million, non-GAAP EPS expected to be between $1.85 and $1.95 a share.

Thank you for being with us on the call today and I'm glad to open the year with these results.

Now let's open the call for your questions.

Thank you.

(Operator Instructions) Our first question is coming from Sterling Auty with JPMorgan.

Please state your question.

Yes, hi, thanks, guys.

Gil, you broke up a little bit.

Could you repeat the revenue guidance for the full year?

And then the follow-on question is, were there any customers that you felt that hesitated purchasing waiting to see the close of the acquisition before deciding on a purchase?

First, the revenue projection for the year is $860 million to $920 million.

And again, the non-GAAP EPS for the year is between $1.85 to $1.95 a share.

Now, wherever we have customers waiting before purchasing appliances to see close of the acquisition, I think the answer is probably yes, I'm not sure how many and so on.

I mean overall, I think there were customers [now by days] building for low times.

Nokia has been in a period of almost a year of certainty about the future of their business and we hope that now a day we've just past all the hurdles and all the milestones and the future is clearer.

I think within the next month or two, we will [still lead the pounds] with partners and customers and showing them our road maps or intentions around all the products and I think we're just starting that.

We had the first partner meeting in the US last week and we intend every week now to have additional meetings, talking about meeting at executive level.

And in the next coming weeks we're going to have such meetings almost in every region of the world.

All right, thank you.

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

Please state your question.

Hi, guys.

I just wanted to get a little bit more detail on the assumptions for Nokia.

Just how much revenue are you including in these full-year numbers?

And then also how much did you write down as far as the services revenue goes?

I think when we made acquisition, we gave a general estimate that the Nokia business should be, should contribute to our results about $100 million a year.

We're still standing behind that number.

And that's after all the writedown, another writedown.

They talk to what we think we will recognize roughly the remainder of the year.

And keep in mind that this number is also subject to uncertainties in the economy.

So I think what we are providing now is a unified outlook with the two numbers.

We haven't looked too carefully about which number goes where and I think we are expecting customers to shift from one product line to another.

And I think if the overall line projection remains overall outlook on the business and maybe taking it a little bit I would say I think to the realistic side.

I do think we have people on our [synchronization] that looks for some more directive growth and a little more opportunistic about the revenue line.

I think at this point it's prudent to us to be on the, I don't want to call it conservative given the economy around us because we are showing healthy growth and we are showing good numbers and so on, but I would be a little bit more realistic view and look at the realistic market outlook.

Tal, what do you think about the writedowns, I don't know if you deferred revenue.

Yes, I think just to clarify, according to accounting rules a portion, a significant portion of the deferred revenues are not -- we're not being able to recognize -- we are not going to add it back.

Therefore we will have only one line of revenues, GAAP revenues.

And we will not add it back to the numbers, so it's lower levels in an ordinary course, this does not have that effect.

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

Please state your question.

Hi.

Wondering, Tal, if you could talk a little bit about maintenance revenue, which has been sort of -- or I guess the subscription support line, which has been somewhat more volatile than I would have expected.

It was strong the last couple quarters, then sort of flattened out into Q1.

Is there anything on the professional services side or anything else that might be driving that volatility?

Not really.

We actually see [we see the services flatten] last year we seen the Q1 and Q2 remain on the same levels and then it picked up towards the end of the year.

It's the very same level we've seen in Q4 and that was $123 million and reflects 8% growth compared to Q1 last year, so nothing out of the ordinary.

We see the same renewal rates.

Everything is going pretty well then.

And then just two

-- we have seen in some cases more long-term contract about services subscription and so on.

And -- but overall, I think that we are very encouraged by actually the stability of that number because the renewal rate is very high and we don't see too much pressure as you can expect otherwise in this economy on this number.

Got it.

Then just related to currency, Tal, could you quantify the benefit, either quarter over quarter, year-over-year, from currency on the expense line?

Currency, okay.

Sure.

This quarter -- in general, the currencies around the world are changing very frequently in the recent two years.

We have seen a significant decline in 2007.

We've seen it in the beginning of 2008 and then towards the end of 2008, the dollar corrected itself or strengthened itself against other local currencies.

Bear in mind that approximately 50% of our expenses are in local currencies that are not dollar.

Mainly the Israeli Shekel the Euro, the English Pound and so on.

In Q1, it continued the strengthening of the dollar and therefore I think on average it was about 7% in local currency and strengthening.

So all in all, it had an effect of about $2 million or $3 million comparing to Q4 and around $6 million comparing to Q1.

Great, thank you very much.

You're welcome.

Our next question is coming from Kash Rangan with Merrill Lynch.

Please state your question.

Hi.

Thank you very much.

I was just wondering if since you closed the Nokia transaction, I'm sure you've had an opportunity to get to understand the organization a little bit better.

What are some of the surprises that you are finding and what kind of synergies from a product perspective, operating expenses perspective, should you be expecting going forward?

Thanks.

So let's talk to who is operating -- I don't like to call it efficiencies, but structure.

In terms of our sales force, we are facing basically the same customers, the same channel with very similar product.

So we added almost the entire Nokia template to our field, but we are basically going to reassign the regions and people are going to find themselves in very different roles.

They are not going to have two people calling on the same account or the same channel, so basically this will strengthen our team operation in a pretty big way in that regard.

In R&D, similar not identical, because in the future we are going to develop unified product line.

So we are not going to have separate developers for a -- Nokia operating system and separate all people for Check Point channel development.

We are going unify many of these development goods.

Of course we have going to have -- a lot of support and a lot of enhancement to the current version and the current appliances, so not necessarily all the people are going to work on new jobs/projects.

And as I said, the other people primarily in development, technical support because we didn't have many people in other areas, like logistics and finance and HR and MIS.

We are my marine layer primarily going to use the Check Point infrastructure for that and especially having this deal -- after the purchase of this deal we didn't -- Nokia, the part that we acquired didn't have many of these people.

They were getting services from the corporate Nokia.

There is always some risk in the level of sales, I mean whether customers are going to purchase, which product people are going to purchase, which product line.

And what we see for the future, we are trying of course to [cause] it down, but it is the time [subject of the week] is also about the business term, whether customers or not customers, partner primarily who try to get the best of both worlds in terms of business terms.

And in the next quarter or so, we want to implement a transition and change all the business terms to all the Check Point partners to be in line with the same business practices unified set of business practices.

And these are a lot of technical things, but things that also financially impacts like discount rate and product pricing and things like that.

So these are also things we have to work out in terms of potentially unknown about how the market behaved when you implement those changes.

Thanks.

It looks like there's a lot of moving parts here and certainly operationally there's a lot of realignment that's going on.

I just wonder if you factored in any potential for risk in integrating the operation going forward, how comfortable you feel with where you stand with -- and with different pieces of channels, the sales, the marketing and the research organization into your Company?

So first, the good news is so far things are moving pretty well.

It's not too much time, but it's already two weeks and all the Nokia people are in their new positions with Check Point.

We see a very high level of motivation, fit of the people into the organization, so on.

We get good feedback from the charters and so on, but also by the way some of the risky part because if you don't see many big troubles in the beginning that means that problems ultimately could come next.

Because we will have some more, some more things that are unforseen with respect to that.

In terms of reaping the financial model, again, today's economy it's very hard to say what we found and then what we will become.

But we did give a wide range and we did take what I think is a relatively a realistic or conservative even approach to the growth numbers if we wanted we could come up with a much, much higher projections again.

If it wasn't for today's economy we might have done that, today, I'd rather be in the more realistic conservative side, especially when we're talking about the top line numbers today.

Thank you very much.

Our next question is coming from Israel Hernandez with Barclays Capital.

Please state your question.

Good morning, or good afternoon, everyone.

Quick question here around deferred revenue.

Looks like that was down quarter over quarter a couple of percentage points.

Could you just talk about some of the factors that were driving that?

I would have expected that to be up sequentially.

Thanks.

Well, I believe that the main factor, I will let Tal comment later, but I believe that main factor was simply the fact that many people renewed their contracts in Q4.

I think part of the people and the fact that people wanted to finish the year and almost to quote flex the budget, but many customer which is we heard didn't know what's going to happen in 2009, so many customers wanted to renew their contract in 2008.

Of course there were sales people also had the motivation to close many contracts last year rather than the beginning of this year.

Having said that, we've had a pretty good renewal rate for the beginning of the new year.

We are maintaining very high level of deferred revenue and so I'm actually pretty pleased with the results.

But I think some of the Q1 numbers actually we've seen in earlier than Q4 deferred revenue.

Sorry, go ahead.

I don't want to cut you off.

Go ahead, Tal.

Yes, no, I just want to see you can see the growth rate in Q4, we've seen that the deferred revenues grew more than the revenues.

And I agree with Gil, it's a shift between the Q4 and Q1, earlier closing of booking of -- and we see often the renewal rates which did not decrease.

We don't see a decrease in the renewals, so just shift between the quarters.

Okay, great.

And if you could just kind of provide us a little bit of an update on the Pointsec business.

What trends are you seeing there?

Is the business still growing?

What are you seeing competitively, any changes in pricing, et cetera?

In that business first of all we don't look at it anymore [exponentially] which is -- unified our entire end point offering.

In Q3, we came up, finally even though we lead -- what we think is a very revolutionary product a total end point security agent with disconnection, anti-virus, anti-spyware, personal firewall, program control, media encryption, I mean all of the complements with one VPN I forgot to mention, very important in one single unified enterprise suite and so far we're seeing good traction for that.

The reason I don't think that the financial performance was as good as we wanted it to be this quarter.

I think this is the result of two factors.

One is the new products.

Second is where we're -- the people were focused and what we're trying to do.

Interestingly, we see that in a lot of deals.

We are seeing better pickup by the channel, but the average deal size went down on the product line.

And I would say as a result, I mean I don't have all the numbers right now in front of me, but I would see results probably there is also some price erosion of price pressure on the end point, on the end point product in general.

And if you're counting that obviously we would like not to happen, it doesn't have much of -- these effects on our business, but maybe has more effect in other parts of industry.

Thank you.

Our next question is coming from Robert Breza with RBC Capital.

Please state your question.

Hi, Tal.

I was wondering if you could talk a little bit about seasonality and how we should think about the Nokia acquisition being integrated?

Is there any seasonality from the deferred revenue or just overall trends in the business that you would kind of alert us to or tell us to think about as we kind of model going forward for the rest of the year?

Thanks.

Sure.

I think the main item that referred to deferred revenue is that the majority of effect count in the first quarter of consolidation and then we see a reduced effect.

So the effect of not being able to recognize part of the service revenues as they were part of the deferred revenues at the closing date is reducing over the quarter and the effect is getting lower and lower third quarter.

It should be over approximately four quarters, the effect, and it should be reducing significantly between Q2 to Q3 to Q4.

Just I would offer, is that the Nokia business doesn't have a very different seasonality than the Check Point business, so it's relatively similar.

So far we've seen the Nokia sales less back end loaded than the Check Point sales within the quarter.

But again I don't know if that will change or not.

Okay.

Maybe one follow-up, Tal.

As you look at DSOs, would you expect as we start to maybe stabilize from an economic perspective that DSOs should start to get back down, or how are you thinking about DSO and the trend there?

Thanks.

I think the main well when you look at the details of the accounts receivable, then you see that actually the DSO taking into account last month revenues is around 35 days.

So I think the DSO is quite good.

And the fact that you take the average quarterly then and as a result of the fact that the quarter became more and more back end load, it just pulled the number of the DSO up.

So as long as the phenomenon back end loaded quarters will continue, then I expect the DSO to remain in the same [as it has].

I think you can see the evidence of operating cash flow.

The operating cash flow is primarily a result not of this quarter results, but of last quarter collection, the collection of Q4.

And you can see what the record number is, even the fact that last quarter was also very good and it was very back end loaded.

Thank you very much.

Our next question is coming from Daniel Ives with FBR Capital Markets.

Please state your question.

Yes, what percent of the install base do you think's upgraded to the appliance to date?

Let me try -- at least to our appliances it's more portion with it.

I mean we have few tens of thousands of the supplies enterprise supplies that we ship that have a total install base of 600,000.

Now part of the total for you being supplied from Nokia are now being recorded, that is about 600,000 customer or engaged to result they're in the marketplace between just again, I didn't try to calculate it so far, but I'll try to give a rough estimate on the phone, less than 10% or less than 10% of the gateways offered so far to our clients.

By combining Nokia it would be -- it would be maybe 20 to 30%.

Without Nokia it's less than 10%.

Okay, thanks.

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

Please state your question.

Good morning.

Good afternoon everyone Thanks for taking my question.

Tal and Gil, if you could talk to linearity on the quarter, in particular, I'm asking more to understand if you're seeing some sort of bottoming.

As you looked at how March came in relative to February and January, and then as you think about how the pipeline has built, are you seeing any kind of signals that folks are getting a little bit more comfortable with the fact they have budget to spend, or is it still quite tough out there from a spending perspective?

I think, Gil will add later, I think it's quite hard to comment on that since the quarter is so back end loaded that you can't actually recognize a change in behavior in that regard.

This quarter was more back end loaded than Q1 last year and slightly less than Q4.

So I don't know how to translate that into -- I would say the quarter was very back end loaded.

Again, from what I've heard from other CEOs this quarter is phenomena happing in all of the marketplace- January and February were very quiet months and very encouraged to see this is still a strong ending in third quarter.

I don't know if they can attribute that to a change or behavior in marketplace or just to the fact that our quarter indicates, it is more back end loaded.

If I want to see the full half glass then it is the economy.

If I want to see the empty one, just the fact that -- I mean it is good thing is that people made numbers and it has been put their forecast, but the quarter's are just be coming back end loaded.

Got it, okay.

Then just a quick second one.

You now keep growing that cash balance, with that great cash collections this quarter.

Is there anything -- I mean as you think about the use of cash, would you get more aggressive on the repurchase?

Would you ever consider dividends?

How -- M&A?

I mean how are you thinking about that use of cash?

I think we're using -- we're looking at all the options.

We've clearly continued to execute on the buy back program.

We are looking for more acquisition definitely this time in the marketplace there are interesting opportunities.

Again, it doesn't change the strategic outlook of how easy it is to find companies that would fit our portfolio but clearly with are seeing interesting opportunities for acquisition.

And now that we've finished the Nokia one, we are more open to look at the other things and to accelerate the pace in which we are looking.

And so I think we are open to all the options and every quarter and every time we look at what we the right thing to do it, is the business in general we will move the couch more in particular.

Okay, great.

Thanks very much.

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

Please state your question.

Thanks for taking my call.

Really kind of two product categories I want to delve into a little bit more.

You guys are focused on software blades now and virtual deployment of firewalls, as well as IPS later this year.

Can you talk about how these delivery methodologies are impacting purchasing trends?

Or you expect them to?

And also, with respect to virtualization, what do you think is the impact of your business, as well as the impact to ASPs as people look to deploy virtual firewalls, virtual IPS, et cetera?

So first the software blade is some form of utilization but not a -- but a different kind.

It's our own thing for that.

But the software blade is actually very good, especially given today's economy because many customers looking to departure that they were constantly using multiple systems for multiple vendors with multiple operating themes are looking more and more carefully about consolidating purchases and getting a higher level of economical efficiency and technology efficiency.

They need the technology and I think the software blade gives them the platform to do that.

They can take their firewall, they can take their gateway and add to it many more functionalities, IP -- IPS is clearly one of them and clearly one that I think can have a big impact or loss in the low of the marketplace in general.

Because you can definitely keep IPS, it's very high speed and our gateways get much better security at operating cost that can go down between 60 to 90% on the IPS part, which is I think something that again -- year ago when I talk to customers, the level of openness was low to medium.

Today I think the level openness of customers to rethink the end is starting to be high.

So I think from that perspective, it will help.

And virtualization in general is not a trend that there has been a lot in our industry.

We do have virtual addition to our general product.

We do have the VSX product line, which allows companies to consolidate, or telco's to consolidate hundreds of gateways and dissolve physical gates.

The VSX is a product line that exists for many years and is doing okay, it is a very stable product.

I can't say that we see big traction in terms of customers trying to build, use customers, us firewalls or VPNs or security in a virtual environment.

Probably because they want to look at the security of the dedicated feature, very high performance with existing [hub or front] data center and not inside.

Some of it I think is a big potential for us for many years to see that more and more people deploy virtual environment than need to secure these environment also from the inside and not just from the outside and with VPN one of the VE you definitely have the ability to do so.

And given that they are the only major software Company in this space, I think that we will benefit from that if customers need to implement that and there's no significant I mean there's not other vendors, significant vendors doing that today.

Okay, and just a follow-up, as you look at the software blades and where you think your best position to gain share, do you think IPS is the segment where you're best positioned, or do you think there's other segments that are equally good opportunities?

No, there's a lot of segments that are an opportunity for the software blades.

Because if the one thing it does for every customer is just tell them whatever you have and we have about 20 software blades, so it really allows very flexible, very manageable, very cost effective way to allow customers to operate.

Now, first, many customers will need to operate the software blade architecture and that will take some time.

But customers are looking very favorably.

There are many customers that are centralizing Check Point and focused about whatever key vendor, but their main use is the primarily firewall.

And for each one of these, VPN, and there's acceleration, and there's many more areas in security.

There's [esoten] VPN, there's [more accent] where there is so many things that they can do, again, I think that IPS is one of the big ones, but it is definitely not the only one in terms of real potential.

Thanks.

Our next question is coming from Shaul Eyal with Oppenheimer.

Please state your question.

Thank you, hi.

Good afternoon, guys.

One quick question, general question for you, Gil, on my end.

Basically since you started the due diligence process on Nokia's Appliance division and basically until today, kind of the first time in which you're discussing financials for the division, any, any changes in views, any skeletons coming out, coming out or anything unusual or basically your views becoming more favorable or just neutral?

Basically what you had seen in the first day is basically what you got when you provided us with the Nokia guidance today?

I think general, first, the economy obviously has been included, but in terms of what we've seen with Nokia, Nokia is obviously a reputable, good company, we haven't found any skeletons and what we are finding so far is pretty good.

In terms of financial due diligence, I don't think we have any surprises, there is suprisingly no surprises right now.

If I do have one surprise, it's a positive surprise that we see a very loyal install base for the Nokia IP appliance platform and very enthusiastic one.

And I think that is very, very important because we are seeing with the Nokia customers, many of them, many large ones are very committed to the operating systems there, the platform there, and are looking forward to Check Point continued support.

And that -- so that perspective make it even more amenable purchase on our side.

I don't know, Tal--

Yes, just remind you that this acquisition is not -- we didn't purchase shares of the company, but actually at least from assets and liability and therefore it automatically limits the arsenal of surprises you can have as you don't get the company with -- the books, the commitment, the tax risk and so on.

That's fair enough.

Thank you very much, and good luck.

Thank you.

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

Please state your question.

Hi, guys.

Two questions on the Nokia transaction.

Can you give us a sense for the impact on gross margins going forward?

And if you look at the Nokia revenue stream today, what percentage of that revenue is services-based and is impacted by the purchase accounting writedown?

I think we don't want to break that up to now, but Nokia has a healthy new product and healthy support and subscription portion for the business.

I think it's fair to say that the split between products and services in general is quite similar to Check Point.

And in terms of the gross margin, again, you can't comment on the sense that we don't know how the numbers will end up in terms of what the customers will choose to purchase in the future.

Be it the product and the appliances of Check Point or the products and appliance of Nokia, IP products.

We are also going to offer Nokia product including software now, so the whole model of the gross margin--

The business model for the gross margin will change significantly.

We are also, by the way, in many areas going to reduce costs.

I mean and do differently many of things about the Nokia manufacturing business and things like that.

Difference even when they were down before, the Nokia support business, some parts of this -- were out or going to drastically cut the expense on that.

I mean there's a lot of synergies or opportunities there, but I think it's a little bit early to comment on how it will shape up because that will happen over time.

I don't think that one quarter we are going to change the way we are doing manufacturing and so on.

But over the next year or two, I think we're going to stabilize operating margin there and get as close as we can to the Check Point model.

Okay.

Then one follow-up, you guys mentioned some restructuring charges going forward.

Can you give us any sense for the magnitude of those?

I think it could be in the $10 million, $20 million roughly number.

Again, we don't have those numbers.

Otherwise we may have given them right now.

But when we are talking about in the ten plus of millions of dollars, not hundred, not one or two.

Let's put it that way.

Okay.

Thanks, guys.

Just one comment on that.

It would include the two main things.

One is obviously the amortization of intangible assets as part of acquisition.

And once we will finalize the study then we will have the numbers.

And the second is severance payments and other payments relating to the transaction costs.

Yes, okay.

Thanks.

Our next question is coming from Tal, Ziv with Oscar Gruss.

Please ask your question.

Hi.

Good afternoon, Gil, Tal, Kip and Jerry.

Tal, can you tell us what the dollar rate you were using this quarter?

Dollar rate using where?

FX.

The, the currencies, dollar to share count rate, sorry.

It's very similar in that regard to the ones we used in the guidance.

Okay.

And a quick question about operating margins.

What are you expecting next quarter when the acquisition of Nokia comes into the numbers as compared to this quarter?

I think the first quarter, the operating margins will go down because we're going to have a lot of expenses and we are unsure about the level of revenues.

Then I think as time goes by, we will on one hand grow the revenues and monitor and align the expenses in a better way so.

I think the first quarter is going to have a negative impact on the operating margin.

Future quarter, it will start ramping up.

I think overall, we're still going to be close to the 50% operating margin and we're going to be around that number also in the future.

Yes, just as one sentence, it is break even to accretive already in the first quarter.

The only question that you are referring to right now is to the margin.

And since Nokia business originally does not carry the Check Point margin, then the first quarter will be, will be lower than Check Point margin and it will take a few quarters hopefully to get it nearer and nearer to our margin.

Okay.

Thank you very much.

Our last question comes from Michael Turits with Raymond James.

Please state your question.

Hi, guys.

Couple of questions.

First of all just for clarification.

The $100 million contribution, I want to make sure that's post writedown, so that includes the writedown?

Yes, it is.

Okay, and then --

-- [well the writedown, because it includes] only the portion which we will recognize.

Right, the $100 million is what you'll recognize?

And then any idea the contribution that's built into your guidance in 2Q from Nokia both in revenues and EPS?

No, again, we said we're not breaking down the numbers between Nokia revenues and Check Point revenues.

And we really don't know which type of product the customer will choose at the end of the day.

And then what were -- any rough idea of what your percentage of product was from appliances in the quarter?

What percentage?

Can you repeat the question?

Yes, roughly what percentage of your product revenue was from appliances in first quarter?

It was higher than 40%.

Okay, and then the last question is just that you had mentioned that non-core, non-core revenues really fell off.

Was that all on the Pointsec on data security side, and is there still growth there, or is that data security piece now declining year-over-year?

I don't know if it didn't grow between last year and this year of between last Q1 and this Q1, it did grow last year or at least portions of it.

And I don't know what it will mean for the future of that, but definitely this part of the business is more under pressure than the whole core network security business.

Okay, guys.

Thanks very much.

This does conclude the Q&A session.

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