Check Point Software Technologies Ltd (CHKP) 2009 Q3 法說會逐字稿

Greetings and welcome to the Check Point Software third 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 Meintzer, Director of Investor Relations for Check Point Software Technologies.

Thank you, Mr.

Meintzer, you may begin.

Welcome to all of you joining us today.

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

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

We would like to thank all of you for joining us today for a review of Check Point's third quarter 2009 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 October 29.

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

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

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

These forward-looking statements may include our expectations regarding our sales pipeline, our expectations regarding the performance and customer acceptance and adoption of our products, our expectations regarding the market conditions on our business as we move forward, and our expectations regarding our business outlook and results for the fourth 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 to 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 regarding our third quarter 2009 results that we issued today and the risks assessed in Check Point's annual report on Form 20-F for the year ended December 31, 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.

Additionally, during the course of this call, Check Point management will discuss non-GAAP financial measures.

Check Point's management uses both GAAP and non-GAAP information in evaluating and operating businesses -- and operating business internally and as such determined it's important to provide this information to investors.

Check Point management also believes the non-GAAP financial information provided during the call is useful to investors, understanding and an assessment of Check Point's ongoing core operations and prospect for the future.

The presentation of this nonGAAP information is not intended to be considered an isolation or substitute for the result compared in accordance with GAAP.

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

Now I would like to turn the call over to Tal Payne, Check Point's Chief Financial Officer.

Thank you, Kip, and hello, everyone.

I would like to thank all for joining us today for a review of an excellent third quarter.

This quarter we recorded all time record results across our key metrics.

Our revenues came in at the high end of our projections with 17% growth over the same period in 2008 while our non-GAAP earnings per share was $0.52 representing 19% growth and exceeded our projections.

Before I begin providing you with further details of the quarter, let me remind you that our third quarter GAAP financial results include equity-based compensation expenses relating to our acquisition including the amortization of intangibles and restructuring costs and the related effects from such items.

Let's look at the financial highlights for the quarter.

First quarter revenues were an all-time record of $233.6 million an increase of 17% compared to the $199.7 million a year ago.

Our revenue growth was evident in all regions with Asia-Pacific being particularly strong.

Revenue distribution by geography for the quarter was as follows, America contributed 44% of the revenue.

Europe, Middle East and Africa with 43% and Asia-Pacific and Japan region contributed 13%.

Looking at revenues by type, our product and license revenue came in at $86.9 million, representing 6% growth over the same quarter a year ago.

Earlier in the year, we launched our major software blades architecture and introduced new versions of all our major software and appliance products, incorporating the software blade.

With almost all of the new products, there is now a recurring blade that is included in the basic product.

This portion is recorded as part of the subscription booking and recognizes revenues over a year.

As a result, there's a shift of revenue from products to prescription.

Our software maintenance and service revenue were $146.8 million in the third quarter of 2009 representing 25% growth over the third quarter of 2008.

Related to that is the growth in deferred revenues that was up this quarter because revenues were, as of September 30, 2009, $360.1 million, an increase of $87.2 million or 32% over the deferred revenue balance as of September 30, 2008.

From a quantity perspective, this quarter we saw an increasing number of larger deals.

Transactions greater than $60,000 accounted for 54% of the order value compared to 44% in the same period a year ago.

We had 22 customers and each had transactions valued greater than $1 million compared to 8 in the same period last year.

From an operating profit perspective, we posted exceptional results.

Our non-GAAP operating income was $127.5 million in the third quarter of 2009 an increase of 20% compared to the same period in 2008.

It also reflected in the highest quarterly non-GAAP operating income in the history of the company.

We also continue to realize (inaudible) synergies from our recent acquisition which helped us to achieve these results and deliver nonGAAP operating margins of 55%, up 3 points sequentially.

These are accomplished even with a weakening dollar.

GAAP net income increased 14% to $91.5 million in the third quarter of 2009 from $80.1 million in the third quarter of 2008.

EPS increased by 17% to $0.43 per diluted share compared to the same period in 2008.

GAAP net income in the third quarter of 2009 included an increase in amortization of intangible assets in the amount of $5.4 million relating to the Nokia security business acquisition.

Net of taxes, this charge totaled $5.1 million or $0.02 per diluted share.

NonGAAP net income for the quarter increased to $109.5 million, or $0.52 per diluted share, up from $94.2 million or $0.44 per diluted share a year ago.

Earnings per share exceeded the high end of our guidance representing 19% growth year-over-year.

Both our nonGAAP net income and nonGAAP earnings per share are the highest in the history of the company.

Our effective GAAP and nonGAAP income tax straight for the third quarter were 19% and in line with our guidance.

For the third quarter of 2009, our days outstanding decreased to 74 days from 79 days in the second quarter of 2009.

Our cash flow from operations increased to $126.1 million an increase of 10% compared to Q3 of last year.

We ended the quarter with approximately $1.74 billion in cash and investments.

During the quarter, we purchased -- we repurchased 1.8 million shares for the total cost of $50 million as part of our share repurchase program.

Moving forward, we have $81 million remaining for the $400 million share repurchase program approved by the Board in 2008.

With that, I'll turn the call over to Gil.

Thank you, Tal, and good morning and afternoon everyone.

I would like to thank all for joining us today.

The first quarter turned out to be an exceptional quarter for us as Tal just mentioned.

Ultimately, this is not (inaudible) for our third quarter and even more impressive given the current economy.

We delivered very impressive results and achieved all time record highs across our key metrics, solid execution.

Our revenues came at the high end of the range where we exceeded our nonGAAP EPS projection.

So what enabled us to achieve these results?

There are three main factors which I believed helped us achieve the results.

First, our continued focus on developing closer relations with our key customers and winning a bigger part of their security infrastructure spend that continued to show nice results during the quarter.

Second, our recent acquisition of Nokia (inaudible) and the synergies that we were able to extract from the integration.

Third, the recent product and technologies that we launched.

For example, while demand for IT remains low, our Power-1 11,000 which set new performance levels for IPS in demanding environment contributed several million dollars of revenue.

The UTM1-130 appliance has also helped and the SMART-1 appliance continued to demonstrate leadership of our management platform and also contributed several million dollars.

One particular element in our strategy which has also benefited us each quarter is the entire software blade architecture.

Almost 50% of our new product sales are now based on software blades which is quite impressive.

Usually customers adopt new products six to nine months after initial launch.

Here we are launching three to four months after the introduction.

With a big portion of sales already on the latest version, the software blade is helping us drive short-term results while (inaudible) to the long-term potential and to the deferred revenue also related to (inaudible).

Geographically, we have seen pretty good results around the world.

I was personally pleased to see that the (inaudible) business grew by 27% year over year.

We see (inaudible) internally with increasing potential for the Asia region and we expect to further focus on this opportunity.

The Americas also produced healthy results this quarter which was encouraging given the kind of economic climate.

Now I would like to address our financial projections for the rest of the year.

Keep in mind that our results have been very good, the software economy is not behind us.

My projections are going to raise the range we provided before but the level of uncertainty in the market is still high.

For the fourth quarter of 2009, we expect revenues in the range of $245 million to $268 million.

NonGAAP EPS is expected to be between $0.53 and $0.60 a share.

GAAP EPS is expected to be approximately [10] shares less than that.

For the full year of 2009 we expect revenues in the range of $897 million to $920 million and nonGAAP EPS to be between $1.97 to $2.04.

GAAP EPS is expected to be in the range of $1.60 and $1.67 per share.

Thank you all for being with us on the call today and now let's open up the call to questions.

(Operator Instructions) Our first question is coming from Katherine Egbert with Jefferies.

Please state your question.

Hi, good morning, good afternoon, good job guys.

How much was hardware as a percentage of the mix the appliance business and also your gross margin was flat quarter on quarter.

If hardware is going up, how is that you're maintaining a flat gross margin?

Thanks.

We delivered more than half of our resolutions this quarter on appliances which is a slight increase from last quarter and is a consistent increase and it's higher than last quarter.

I think the main thing remains not in the venue of the hardware but in the venue of the software that comes on top of that, and I think we've continued to execute well and managing our logistics and so on and continue to maintain good gross margin on that.

And then real quickly, your Europe business was quite strong last quarter.

It was pretty good this quarter as well.

What do you think differentiate us from other software companies who are seeing a lot of of weakness and disappointment and EMEA, thanks?

I don't know what to say particularly what differentiates us from other companies.

I think the demand for security remains good.

I think helps us generate good business.

One is the continued close relationship we have with key customers.

Many of them are new.

Europe is one entity.

There are many countries and we have very different performance in different countries and different regions of Europe, and the second one is the Nokia appliance line and that helps us generate better results and new products and I think these worked well for us all over the world, including in Europe.

Next question please.

Our next question is from Jonathan Doros with Raymond James.

Hi, guys.

I know you guys don't break out the data security segment but can you tell us how this performed relative to your expectations and if that business increased quarter on quarter?

Thanks.

I think we're in the middle of -- I think we mentioned last quarter it hasn't changed much in this quarter.

I think we're in the middle (inaudible) of our entire end point product (inaudible) and that includes the data security business and we expect that transition in terms of new products and new versions that many customers are expecting to happen between the end of this year and the beginning of next year, and so far this quarter it was stable compared to other quarters and I think we're looking for the big change into that and the big increase towards 2010 and 2011.

Thanks.

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

Please state your question.

Hey, guys, good quarter.

When you think about M&A, given your cash balance and how well you guys have been doing, just talk about M&A and your thoughts going forward.

Do you expect to be more active or just more opportunistic?

I think we continue to look for good acquisition opportunities.

I think as we have seen in the last few years we are ready to do all types of acquisitions from small technology companies, large companies in new markets into existing companies within our core market.

I think we already see our investment into looking into companies and identifying the strategic potential.

Almost everything we do (inaudible) not opportunistic but from a strategic perspective.

This quarter we did that.

Several people in the corporate development department we did grow seasoned executives to head corporate development department and, as I said, we need a few more people to focus more effort but as I said, we are ready to do something it does not mean we'll find the right opportunities or anything that is expected in the short-term.

Next question, please.

Thank you.

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

Please state your question.

Hi, guys.

Just looking to get more detail just on how the appliances trended in this quarter.

Do you see any sort of difference between called large enterprises and small and mid-sized businesses and then, Gil, as you look out on your business over the next couple of years you talked about appliances being north of 50% of product revenue now.

Where do you see that getting towards?

I think in terms of product mix I have not seen big shift.

As I mentioned, I mentioned two examples, one Power-1 11,000 which showed nice growth.

It is a new product at the high end and had good traction.

The other one is the opposite, (inaudible) which is the low end appliance.

Both performed well so I think we have potential on both ends.

Moving forward, if we look at the platform not at the replacement or anything else, we look at the platform to deliver a more complete solution to the customer.

It seems that customers (inaudible) the customer asks for that and the customer (inaudible) but the big revenue is the (inaudible) appliances and I think that's what we have to remember and hopefully our customers understand that very well and that is why they buy more from us than our competitors.

So, I do not know to completely answer your question, it is very hard for me to say what would be the percent moving forward.

I think on the network security side we are already the majority of the business there.

That should be stable, maybe increasing a little bit.

On other parts of the business like endpoint, data security, these are areas of the business are not based on appliances so basically if we are successful and we will increase our sales in those areas which will drive down the percentage of appliances.

Got it.

Thank you.

Our next question is coming from [Brad Zelnick] with [McCory].

Please state your question.

Thanks.

Good morning.

Nice quarter, guys.

On Asia specifically, it sounds like result were very strong there and I just wanted to get a better understanding of what was different this time in Asia versus last quarter or last year for that matter and I notice in the quarter you announced a deal with Fujitsu.

I am pretty sure that was specific to the Americas, although I understand you also have a long-standing relationship with them.

Just wanted to better understand that, what was announced and if there are any ties to what you're seeing in Asia this quarter, thank you.

Let's talk related to Asia.

I think we're investing a lot of efforts in making -- we believe Asia has a lot more potential than what we are selling and are executing even though in many countries in Asia we are the leaders and we have very good results but clearly there's much more potential there.

We have been making lot of effort in the Asian region for a long time.

I think we've started seeing a turn around in our results about a year ago and this quarter it continues.

I think with this quarter demonstrated two things.

One, Q3 is the end of the fiscal year or the budget year for many areas in Asia so clearly compared to the rest of the world the fourth quarter is (inaudible) with the rest of the world.

Second is the continued execution.

Now, as I mentioned, we've seen better indicators internally than what just showed in revenue, that's why I mentioned that I am particularly pleased with Asia.

I truly hope that trend will continue because potential is clearly there.

To the second part of (inaudible) exactly where were you looking, what was the question?

Just touching on [Fitsjitzu] on what you announced and whether that ties back to anything with your relationship in Asia.

I think the Fitsjitzu relationship is very good.

It's a very large integrator and specifically we had some announcement.

I think has a little to do with the Japanese part even though I would like to see more and more synergies of that and I don't think that contributed or changed much result in the first quarter.

I think it's more additional potential with Fitsjitzu.

Thanks, Gil.

If I would just ask one more follow-up.

When we think of Asia by product, by country, is there any more visibility you can give us?

Any more countries that were strong, and as it relates to privacy, which is a huge loss for software in general.

Given your movement to appliances, is any of the strength you think coming from the fact that you are now able to offer a solution that you know customers are more easily able to realize the value in?

Thank you very much.

So for the enterprise business we didn't see a lot of piracy --to any major factor.

We seen some in Asia -- and a lot of local vendors and lot of competitors who compared to the rest of the world the market -- I think we're breaking through parts of it.

In terms of this quarter in execution and I think it was fairly good across all of the countries in Asia we're making good progress in China, but it's way too small to have a big impact and we have much more potential.

India we're solidly executing every quarter.

Japan is the biggest country that we have and pretty decent results every quarter.

I'm not -- there's no -- Australia had a great quarter this quarter but I'm -- I look here in the country.

In Asia pretty much very positive in the country.

The numbers are too small to have one country -- if I look at the numbers by country it's too small to have any huge impact on the overall result for a single country.

Thank you.

Our next question is from Israel Hernandez with Barclays Capital.

Good morning or I guess good afternoon for you guys.

With respect to -- there's been a lot of conversation around a potential network refresh cycle as we move into a more favorable spending environment in 2010.

Can you talk about what type of impact that may have on your business?

Does that present new incremental opportunities for you as companies go in and upgrade their networking infrastructure from a security standpoint?

Maybe talk about perhaps the competitive impact on such a scenario.

Does that give Juniper and Cisco, for example, an opportunity to come in and take more share?

Thanks.

So first I don't know if they're going to be a big upgrade next year or not but if there will be I think that we are very well positioned to take part of it.

New platforms and new levels of performance and now that we are supplying the first solution with the municipals we have very, very good performing -- in key applications, securities that we outperform any other type of solution by a huge margin in terms of performance and now that we sell appliance we've can participate.

We won't think too much because we won't be getting the subscription business and our partners like Nokia are seeing a big change in terms of selling new appliances.

Right now when we have all of the appliances from the low to the high end.

Something like that happens should be positive or not and I don't think there's any indication where he's going to be a major shift in or not.

All we said is how can we participate when the company upgrade metrics.

Great, thank you and congrats.

Our next question is coming from Jeff Evanson with Sanford Bernstein.

Hi, wondering if you could give some color on how currency impacted your results and how you're managing the significant moves between the dollar and the shekel.

In general, about 40% to 45% of our is do you to -- the rest in dollars.

The dollar is getting weaker then our expenses are increasing and when the dollar is getting stronger, then our expenses are reducing.

That's in general.

Now every shift this quarter and previous quarter was the same since Q2 and now Q3 weakening of dollar against most of the currencies around the world and therefore is increasing our expenses.

We look at this quarter, the expenses were increasing about $4 million but we have positive hedge which reduced in about $1.5 million or so.

But it's effective between $2 million to $3 million this quarter which means between $0.01 to $0.02 this quarter.

So we manage it on a regular basis.

We partially hedge and looking forward to see how we're dealing with that think I think we dealt very well and you can see the margins of 65% this quarter, which was an expansion of three points was after getting the increasing expense of this $2.5 million.

What do you assume about currency movements in the guidance that you gave?

We don't assume too much of that.

We also have wide range in part we can't anticipate all of the factors that would contribute to that and our main focus in managing the business is doing what is right for the business and keeping in mind that biggest expense that we have is regarding headcount and that doesn't change -- local currencies and fairly stable, it's not something that we can change from one quarter to another.

Thank you.

Our next question is coming from Gregg Moskowitz with Auriga.

Thanks very much.

Gil, just wondering if you could comment on your pipeline entering Q4.

I heard your comment busy some caution in this economic climate, just wondering if you could talk about the quality of the pipe and just kind of at this stage what your expectations are for some sort of budget flush at the end of this year as compared to maybe what you saw in the December 2007 and 2008 periods?

So first I think we have a healthy pipeline.

We have good forecast from the sales force all these aspects.

The people who are delivering are fairly opportunistic.

Pretty much every year that I've been in business Q4 was a good end for a year, Q4 usually turned to be a positive quarter and also raising the expectations given -- .

Having said that, I'm just saying that we're feeling the soft economy.

We haven't seen that ending, there still can be surprises.

I hope there can be more surprises upside.

There's clearly a lot of potential but I'm not sure that the world has shown everything that it can surprise us also for -- .

At any rate, our quarters -- usually doing very good work of getting forecast but we actually know what we're going to have, usually the very, very last part of the quarter and that doesn't change much in recent quarters.

I think on the beginning of January start the

Okay, great and then just a follow-up for Tal if I could.

Was there any change this quarter in terms of a shift from perpetual licenses to quarterly annual fees vice-versa?

Yes, when I explained shift that we were seeing, we have more and more revenues that are recognized subscription and therefore it goes through the deferred revenues and recognized over a year into the revenues line the subscription revenue line versus the product.

Our product price in many products now software blade architecture are included all four portions that relates to blades and, therefore, that portion is being separated from the products price is being presented as part of deferred revenues and recognized over the few.

So you see the growth of the 6% that we saw in the products revenue is net after the effect of that shift to the revenue --

let me be a little bit more specific -- the first year of blade is already part of the product price.

If that portion is now not part of the product revenue but part of the subscription.

Hopefully it ties over the next year gives us a good potential because we hope many customers are renewing a year from now and we'll have additional annuity for more years, not just for the first year, but we've -- bigger growth this quarter and probably 6%, 7%.

Something well over 10% taking portion that was shared from the net product sales.

Okay, great.

And actually just one other quick one.

Can you just comment briefly on how your government business performs both in the US and internationally?

I don't have any particular on that.

I think it perform weld all over the world I think one -- especially for the newest government -- and specific government sectors.

Thank you.

Our next question is from Todd Raker with Deutsche Bank.

Hey, guys, nice quarter.

Can you talk about contract lines at all?

I know there's seasonality in the deferred revenue mix here but it looks like long-term deferred revenue sequentially was up and short-term was down a little bit.

Are you seeing customers and into longer team deals as you move to more of a subscription based business model?

The short answer is yes, we do.

The long answer is not substantially.

We have a little more long-term contract and new forms if we work with customers but I don't think that there is -- it's very, very substantial at this point.

Okay, and just going back, I know it's been asked a little bit, but if you look at Nokia customers and they're path to upgrading, any signs that you've had it in house for a few months here in terms of are Nokia customers pushing out the decision to upgrade?

Are they on track?

Are they ahead of plan?

And what's the biggest factor for a Nokia customer to decide to upgrade?

Nokia customers are all customers.

-- I think acquisition of the Nokia lines business was received very positively by every customer and they all had clouds of uncertainty going for a very long time and something -- for the last 16 years or 12 years since we worked with Nokia, our competitors have always tried to start rumors about Check Point and Nokia working well and not working well and create uncertainty around the future and now there's no uncertainty around the customers know they get 100% integrated solution, 100% support from Check Point and reaction is positive.

It's hard for me to say how much it translated to short-term results, but so far we are very, very pleased with what we've seen and with the customer reaction.

Okay.

Thanks, guys.

One more factor that is even more interesting is (inaudible) in many cases we moved providing the entire business, we moved from being mid sized supplier to these customers to a much larger size and that is very positive discussion before to, I don't know, $400,000 in the subscription fees revenues and once every two years big upgrade of the hardware.

Now we are an over $1 million vendor every year.

It's more consistent.

And it brings a lot of good discussion and good dialog with the customers and expansion of the business.

(inaudible) more softer product, some by Power-1.

It's not necessarily that you see that in a certain product but it brings a much better relationship with the customer.

Thank you.

Our next question is from Rob Breza with RBC Capital Markets.

Hi, thanks for taking my questions.

Maybe as a follow up to Gregg's question.

Gil, you talked about product licenses would have been up had we not had a deferral for the blade architecture.

Maybe just asking the question a different way.

If you look at the initial sale today for Gateway products, can you tell us like what as a percentage of let's say of $100 transaction is being deferred today versus maybe a year ago period.

Clearly it's going to be up, but any kind of help around that if we kind of model going forward I think would be helpful?

Thanks.

It's very hard for me to do and I don't have it the (inaudible) in front of me.

If we (inaudible) let's say the size of the blades and (inaudible) .

This quarter is several million dollars but I'm not sure what will be the exact moving forward.

I think the shift is a positive shift and especially a year from now we'll see how many of customers actually renew this portion and not just

Great, thank you very much.

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

Good morning.

This is (inaudible) here for Brian Freed.

We are wondering, given the endpoint of future driver for future growth and Check Point is stepping up development and marketing in the area, can you provide some qualitative feedback on the response and channels of customers from your recently ramped up marketing initiatives?

Well not sure I everything you said but the new endpoint which has been generally positive, I think we have a lot more to do to spread the word out, to get implementations out, as I've said, we're in the middle of a complete transition of the products line into the next version of the end point and that should finish at the beginning of 2010 and so there hopefully starts showing much more growth.

All right, thanks guys, great quarter.

Thanks.

Our next question is from Sterling Auty with JPMorgan.

Please state your question.

Thanks.

Hi, guys.

Can you give us a sense as to how much more profitable the channel agreements that you have in place are compared to what Nokia had?

It seems like you get a lot more profit per dollar on the Nokia revenue than they were able to?

First, Nokia I think never published their results.

I don't know about that.

I don't think that the channel agreements have changed too much from that.

I think we simplified combined that into a single agreement with our channel partners and not to multiple different programs.

I think what makes our business more profitable is internal operation.

It's not the channel margin, and from -- I think we tried to make many, many efforts (inaudible) more profitable for most of the sales because we want to keep the (inaudible) selling our solution.

We don't need two sales managers on every account.

We don't need two sales managers for every channel.

We can have one sales manager and the other sales people can focus on expanding opportunities or in many cases being more efficient.

Almost all parts of the business which required and direct operations synergies (inaudible) .

Okay, and Tal touched on linearity a little bit but I wonder if we could just revisit that.

I know it's a back end loaded business and always will be, but can you comment at least for this quarter.

Did you see some of that pressure alleviate a little bit?

In other words, did it get a little bit less back end loaded than what you've seen in the last couple of quarters?

I think we've seen in Q2 and also this quarter, we've seen some reduction from the reduction in Q2, reduction in Q3.

Nothing too significant.

Still higher levels than Q2 and Q3 of last year.

Got it, thanks.

You're welcome.

Our next question is from Rob Owens with Pacific Crest.

Please state your question.

Yes.

Thank you.

Looking for a little more color on the software blade architecture.

What was the percentage you gave of new product sales that are based on blades right now and how has that trended over the last few quarters?

I don't think we did give a specific percentage but I think this quarter are we getting close to half of the new sales of the latest software blade version, part of it is from new software sales, part of is new (inaudible), which include software blades, and customers can still chose to buy without the software blade version and definitely combined the old software models.

I think overall I would say that the shift is better or faster than what I've seen before.

We're still a long way to go in upgrading the (inaudible).

Okay, so half of new product sales.

I gather that has been trending up new product sales?

Probably half the new product sales, yet.

Great.

In light of that, why is short-term deferred revenue declining.

I think it was down about 2% quarter-over-quarter.

Wouldn't we expect that if we're seeing a mix shift to at least be flat if not creeping up?

Well it's much lower than last year.

Just remind you that Q3 typically the deferred revenues reduced.

Last year it actually reduced from about $7 million or $8 million and this quarter reduced only $2 million and that's partly the reason why it was much lower reduction in deferred revenues than usually.

Great, thank you guys.

Most contracts have been reduced (inaudible).

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

Please state your question.

Great.

Thanks for fitting me in.

Just on the margin front, you clearly continue to do better and better so, Tal, do you think there's room to keep optimizing the gross margin?

What are some examples of the levers you can pull there?

And then on the sales and marketing R&D side, actually down on an absolute basis even though sales were up $10 million and clearly you talked about the currency impact so they're probably down even more than that.

Could you talk a little bit what drives that efficiency?

Is it sustainable, are there incremental investments you might make now that the overall environment is improving?

I think I'm not sure I followed all of the financial metrics you asked but I think the answer is yes.

I think we're -- there are things we can do more efficiently in the business and there are things that we are doing more efficiently in the business.

My focus in given our profitability is not internal expense management even though simply because we do have the discipline to do it.

The main focus that we have is how to grow the top line, how to grow the revenue and I think discipline that we have on the expense management if we can grow the top line there we will grow the bottom line nicely, and I think what we've shown in the last year is that we can do very well expand (inaudible) and at the same time maintain very good cost management and model and top line growth.

Got it.

Okay.

Thank you.

This does conclude our Q&A session.

I would now like to turn the floor back over to Kip Meintzer.

Well, we would like to thank you guys all for participating today.

If you would like to speak with management or Investor Relations please call our Investor Relations department at 650-628-2050 and we look forward to your calls and speaking with you next time.

Thanks and have a great day, guys.

Thanks very much.

Ladies and gentlemen, they does conclude today's teleconference.

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