Check Point Software Technologies Ltd (CHKP) 2009 Q4 法說會逐字稿

Greetings and welcome to the Check Point Software fourth-quarter and full-year 2009 financial results.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr.

Kip Meintzer, head of Investor Relations for Check Point Software Technologies.

Thank you.

Mr.

Meintzer, you may now begin.

Thank you.

Welcome to all of you joining us today.

This is Kip E.

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

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

We would like to thank all of you for joining to us discuss Check Point's fourth-quarter and fiscal-year 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 February 4th.

If you'd like to reach us after the call, please contact investor relations at 650-628-2050.

Now, before we begin with managements' presentation I'd 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 of available for re -- amounts of ordinary shares available for repurchase; our expectations regarding demand for our security products; our expectations regarding the introduction of new products and the success of those products; our expectations for the continued and additional adoption of our current product and new products; 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 and full year of 2010.

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 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.

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.

I'm happy, once again, to begin the review of an excellent quarter and what turned out to be an exceptional year for Check Point.

This quarter we achieved record results across all our key metrics.

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

Our revenue for the fourth quarter increased by 25% over the same period in 2008 while our non-GAAP EPS was $0.61, representing 22% growth year over year.

Before I go further into the numbers, let me remind you that our fourth-quarter and fiscal-year GAAP financial results include equity-based compensation expenses in accordance with ASC 718; expenses relating to our acquisitions, including amortization of intangibles, impairment with the marketable securities in accordance with ASC 320; and the tax effect of such items.

Keep in mind that the non-GAAP information is presented including 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 the non-GAAP information.

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

In the fourth quarter our revenues exceeded the high end of our projections.

Revenue reached $272.1 million, representing an increase of 25%, compared to $217.6 million in the fourth quarter of 2008, and a 16% sequential increase over the third quarter of 2009.

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

Revenue distribution by geography for the quarter was as follows.

America contributed 42% of the revenues; Europe, Middle East and Africa with 45%; and Asia-Pacific and Japan regions contributed the remaining 15%.

Looking at revenues by type, the our product and license revenues were 120.2 million, representing 28% growth over the same quarter a year ago, and 38% growth sequentially.

This was accomplished, even with the shift from product revenue to subscription revenues as a result of the Software Blade architecture.

As a reminder, earlier this year we launched our Software Blade architecture.

As a result, almost all of our new products have a recurring blade that is included in the basic product price.

This portion is recognized as subscription revenue over a year, resulting in a shift of revenues from product to subscription.

Our software update, maintenance and service revenues increased by 23% year over year to $151.9 million in the fourth quarter of 2009.

The growth in deferred revenues was also significant this quarter.

Deferred revenues as of December 31, 2009 were $425.3 million, an increase of $94.5 million, or 29% over December 31, 2008, and an increase of $61 mil -- $65 million over the deferred revenue balance as of September 30, 2009.

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

Transactions greater than $50,000 accounted for 60% of the total order value compared to 53% in the same period a year ago.

We had 29 customers that each had transactions with a value greater than $1 million, compared to 22 in the same period last year.

From an operating perspective, we posted great results.

Our non-GAAP operating income was 152.7 million in the fourth quarter of 2009, an increase of 27% compared to the same period in 2008.

This also reflects the highest non-GAAP operating income in the history of the Company.

GAAP net income for the fourth quarter of 2009 was $109.5 million, or $0.51 per diluted share.

The GAAP net income in the fourth quarter of 2009 includes additional amortization of intangible asset expenses in the amount of $4.9 million relating to the acquisition of the Nokia security appliance business.

Net of taxes, this charge totaled $4.5 million, or $0.02 per diluted share.

Non-GAAP net income for the quarter was $129.5 million, or $0.61 per diluted share, up from $105.6 million, or $0.50 per diluted share a year ago.

Earnings per share exceeded the high end of our guidance, representing 22% growth year over year, primarily the result of our top-line growth and expense management.

I would like to draw your attention to the fact that this quarter the number of shares used in the computation of diluted earnings per share increased to 213.5 million shares, mainly as a result of the increase in Check Point's share price.

Going forward, the number of shares will continue to be affected by movement in the share price.

For the fourth quarter, DSO, day sales outstanding, were 76 days compared to 82 days last year, a reduction of six days.

Our cash from operations was very strong this quarter, increased by 54% to $138.1 million from $89.4 million in the fourth quarter a year ago.

During the quarter we purchased approximately 1.5 million shares for a total cost of $50 million as part of our share repurchase program.

Moving forward we have $31 million remaining from the $400 million plan approved by the Board in 2008.

In addition, we announced today an extension of the share buyback program with a new program authorized by the Board, enabling to repurchase our shares in an amount of up to $250 million for the year.

Now let's take a look at 2009's fiscal year highlights.

For the year-ended December 31, 2009, revenues were $924.4 million, an increase of 14%, compared to $809 million in the year-ended December 31, 2008.

Non-GAAP net income was $435 million, an increase of 13% compared to $386 million in 2008.

Non-GAAP EPS for 2009 was $2.05, an increase of 15%, compared to $1.78 in 2008.

On the operating side, we achieved the non-GAAP operating margin of 55% for the year, up from 53% in 2008 and 51% in 2007.

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

The synergies associated with the successful acquisition of Nokia security appliance business contributed to this record result.

This is a great accomplishment, taking into account the higher cost structure of the acquired business.

For the year, cash flow from operations has reached a record $549 million, bringing our cash marketable security balance in the year end to $1,846,999,332 and a great way to finish the year.

Now let me turn the call over to Gil for his thoughts on the fourth quarter and the full year.

Thank you, Tal, and good morning and thank you all for joining us today.

The fourth quarter completed a very good year and produced exceptional results.

We are ahead of our expectations and plans for the quarter.

I hope this is a good sign for the global economy, but I can also see in our business results how key initiatives contributed to this success.

All of our product lines produced amazing growth from the third quarter, which as you recall, was great quarter as well.

If you look at the growth of our product and license revenue, it grew sequentially by 38%, the highest quarter-over-quarter growth that I could find in our history.

This is attributed to the execution of our team, as well as the acceptance of our new products, which addressed customer needs.

The two main contributors and initiatives that help us achieve these results in 2009 were a [refined] strategy in our Software Blade architecture.

We've expanded the UTM-1and Power-1 appliance families; we've introduced new appliances for security management, the SMART-1 series; and in the second quarter we've added the IP Series of appliances that we've acquired from Nokia.

The Software Blade architecture, which is part of our R7 tier release, which was introduced in 2009, is now the de facto standard for all new products.

If you recall, in the previous quarter I mentioned that almost 50% of our new product sales are based on the Software Blade architecture.

This quarter that number reached 80% of new products.

For comparison, our previous version, NGX R65, which had very good acceptance, only reached about 50% of new sales after three -quarters.

I hope this is a continued indication that there is a good fit of the architecture to our customers' security requirements.

It's also good to see that the previous trends we reported continued in the fourth quarter.

All regions of the world contributed nicely to the growth this quarter, and Asia led the pack with over 40% growth this quarter compared to a year ago, and close to 80% product growth between this quarter and the previous quarter -- and the previous Q4 in last year.

On almost every possible business and financial metric, the fourth quarter was a great record quarter, from the number of gateways we shipped to the cash balance we accumulated.

But with that in mind, our main focus is investing in the future of IT security.

One of the key attributes of Check Point is our security architecture, which is demonstrated the best with our Software Blade architecture.

We're going to continue and expand it with enhanced network security solution, endpoint technology and an expanding portfolio of data security technology.

With this investment and expansion we expect 2010 to be an exciting year.

Our focus is to help our customers solve today's security maze, one which consists of too many security products from too many vendors resulting in increased complexity with reduced security.

We're building solutions that help our customers reduce the number of security vendors they need, simplify the deployment and management of security, while simultaneously reducing the cost of ownership and most importantly, elevating the level of IT security.

While there are other good companies in the security space, we believe that we are uniquely positioned to deliver on these attributes with the industry's only security architecture that ties all these security components together.

So in 2010 you can expect to us make the firewall an even more important aspect of the security infrastructure and introduce more complimentary security products in additional categories, from mobility to data security.

As for financial projections, the fourth quarter gave us some good reason to increase our goals and plans.

However, it will take a few more quarters to know if what we've seen in the past few months is a year-end flash or indication that the economy's stabilizing and improving, so we're entering 2010 optimistic but cautious.

For the year, we expect revenues in the range of $990 million to $1.04 billion and non-GAAP earnings per share between $2.20 to $2.30.

GAAP-based EPS is expected to be approximately $0.30 less than that.

Beyond the obvious business drivers, there are two factors that impact our projections that are somewhat beyond our control.

Our non-US dollar expenses are expected to grow due to the dollar's weakness, while our revenues are almost exclusively in dollars, and lastly, our diluted share count has grown recently with the increased share price.

Like this year I expect to see a healthy year-over-year growth rate with a strong fourth quarter.

The first quarter is actually expected to show growth rate above the annual rate.

For the first quarter we expect revenues in the range of $232 million to $245 million, and non-GAAP earnings per share of $0.48 to $0.55.

GAAP-based earnings per share is expected to be approximately $0.09 less than that.

Thank you for being on the call today and now let's open the call for your questions.

Thank you very much.

Thank you.

(Operator Instructions).

Our first question is coming from Brad Zellnick of Macquarie.

Thanks, guys, good morning and thanks for taking my questions.

Great quarter, great margins.

I was hoping you could share with us what the mix of appliances were in the quarter, and with that, where do you see them going, and when you go to market,and we think about customer preference, does this business eventually go to 80%, 90%, maybe even completely appliances?

I don't know what you mean by mix of appliances, but all of our product lines and all of our appliances grew nicely this quarter and we had very nice both revenue and unit growth on all product lines.

We've seen great success on the low end of the appliances, like UTM-1 and 130, which were introduced earlier in the year.

They contributed greatly to the number of units and to the revenues.

We've seen good acceptance of new appliances, like SMART-1, management appliances that contributed a few million dollars.

The IP Series appliances produced good results, but the Power-1, UTM-1 and other appliances that we have also produced excellent results.

So I think overall the mix was very positive, very good.

And if you recall, whether -- what percentage of sales will be appliances, first, it's very high today, but let's remember the appliance is the delivery mechanism.

The appliance is not the value.

The value's in the software, which runs on top of it.

I'm very glad that we can combine in Check Point a unique business model that both have the elements of software annuities that software companies enjoy and have the new models and UTM products that, in some cases, appliance or hardware companies enjoy.

So now I can say after three, four years of trying to build this model, I don't know if you reached a stable state, but we reached a very good state of business mixing the two business model and seeing the stability that the software annuity model provides and the new product sales of appliance upgrade cycles and the new appliances provide.

hank you, Gil, and if I could ask one follow up.

Software updates and services came in a little less than we had modeled, as we've taken your commentary around Software Blade architecture to heart, maybe we got a little overexcited about what it could deliver, at least in the near term.

But can you maybe just comment about the drivers to that revenue line.

Even on renewal rates on support are customers maybe opting for lower-end support offerings a d is opportunity for support maybe going more to partners?

Thank you very much.

Again, great quarter.

I don't know.

Again, I haven't seen the model so it's hard to comment on that on this call, but we are very pleased with the subscription and the support results that we have.

By the way, the appliance model also allows us to give customers much more attractive support rates because the mix of support revenues on the hardware and software we can give much lower rate, yet increase revenues in a very nice way.

So if in the past, customers were comparing our software support rates to hardware support rates, and we're in some cases seeing high support rate.

Even, by the way, for software companies, I think our rates are very, very -- are very good in the marketplace.

I think now we have a new mix, and overall I'm excited that we are -- we're very pleased with the renewal rates.

You can also see that on the deferred revenue row, which is the best indicator and the deferred revenue grew very, very well this year.

From my perspective, (inaudible).

Thanks again, great job.

Thank you.

Our next question's coming from Daniel Ives from FBR Capital Markets.

Thanks, great quarter, again.

What are you seeing from customers when they're talking about IT spending growth?

You're a veteran of the industry, what's your sense in going to these customers and just what you're he seeing in terms of buying behavior,changes, and their thoughts on 2010?

I haven't spent -- the last few months I've been a lot in Asia, so I'm not sure (inaudible) because of what you're seeing in the US, but overall my sense the customers are relatively optimistic.

In the past we heard a lot about pressures to cut budgets and things like that, that eased a little bit and we are seeing more interest in new projects.

By the way, when I sudden my script that we've seen in the last few months the very positive trend, last few months is almost (inaudible), and if you'll remember, the Q3 I said that I'm very encouraged by the results.

And since pretty much August I've seen an increase in the level of demand, and increase in new project, sales people are giving more up side and raising their forecast.

So I think for the last four, five months I've seen an increased demand so I hope it's not just year-end budget flush but a little bit more than that.

By the way, that's very much in contrast to what we've seen in the first half of the year.

The first half of the year there was a very big pressure to the low side and the second half of the year the pressure went to the higher side.

So generally I'm saying customers are more -- a little bit more optimistic.

There's no one driver is what we think.

Some customers would like to drive more expenses to operating expenses and less capital, other customers it's the opposite, so there's no one -- I'm trying to recap all the feedbacks that I have -- it's not one trend that I can see worldwide.

Okay, thanks.

Thank you.

Our next question's coming from Katherine Egbert of Jefferies.

Hi, good morning, everyone, congratulations.

Gil, you mentioned that the renewal rates on the updates show up in deferred revenue but I noticed the increase in long-term deferred revenue is not as great as the increase in deferred revenue.

Are people just still buying shorter maintenance contracts?

Well, maintenance contracts are pretty much one year, so it's almost exclusively one year that we have.

We had some unique cases when customer wanted to secure a three-year deal or a three-year -- and to pay for three years, and for 2007 and 2008 we've also introduced a few product model that included three-year subscription in them, specifically the Software Blade subscription.

Back then it wasn't called Software Blade, but security services, what we call subscription, and we're selling -- we're pushing less of that because we've simplified the model.

It's not from a perspective of customer demand or not demand, it's just simplification, and so there is no major change in that.

I think if you looked a year ago and now the percent of long-term deferred revenue was very low, it remains very low, and generally speaking our contracts are almost exclusively one-year contracts.

There's almost no contracts that are shorter than one year, and very few contracts that are longer than one year, exactly one year.

Okay, got it, and then just a quick one.

Looks like at the midpoint you're calling for 22% year-on-year revenue growth for this year, which is quite an acceleration and you only have rough -- just over a quarter of contribution from an acquisition.

Where is that strength coming from and can you talk about the Endpoint product?

Thanks.

First I think it's less than 22%, so let's check the (inaudible).

But overall, what we are seeing is -- I think is a continued trend.

I think we are building our model from bottom up.

About how the business is growing, there's nothing -- I must tell you there's nothing too dramatic.

I think, in my forecast.

I'm trying to balance between sort of -- I'm trying to balance between seeing all the good trends and (inaudible) and product and initiative that we have to being a little bit conservative.

I think if everything goes well and all our new products are as successful as we wanted them to be and the economy continues in the rate it's been in the last four months, I think we have -- I think we'll see even better results.

No as for the guidance, I just want to repeat the annual numbers.

The annual numbers for revenue is between $990 million to $1.040 million and that growth rate at the midpoint -- again, I don't know what it will be, because this year we passed the high end of the guidance.

So I don't know what will be the actual growth and I hope that I'm conservative here but at the midpoint (inaudible) represents about 11% growth.

Okay, thank you.

Thank you.

Our next question --

And I'm very, very happy to see 22 so I'm -- it's not --

Thank you.

Our next question's coming from Shaul Eyal of Oppenheimer & Co.

Thank you, good afternoon, guys.

Good quarter, congrats.

Two quick questions in mind.

The data security segment, how did that perform during the quarter?

So comparing to the third quarter, it was great; again, grew very nicely.

I think most of our data security offerings this year were part of Endpoint business and while I think we've seen some success in the fourth quarter, I don't think it's performed because of the growth engine or it was the -- or it showed the growth rates that we expected it to be.

I do see some signs for change for next year.

I think we're doing a lot of things from product now.

Our latest release, for example that we are releasing for the Endpoint is really the best suite I ever seen in terms of performance, size, functionalities.

The R-73 release of Endpoint is going to be great, both in terms of data security and the Endpoint capabilities.

I believe that in 2010 we'll see renewed and accelerated growth from the Endpoint.

But you asked about data security.

I think in 2010 we also want to go to take the data security beyond just the Endpoint and come up with new data security solutions which will combine the network -- the endpoint and will be beyond that.

That when we are speak about new area of security, data security on the network can be one of them -- is one of them.

Got it.

With respect, Gil, to the product mix as it relates to large enterprises versus SMBs, how did that perform during the quarter with respect to your expectation?

I think the same.

I haven't seen any major changes or any significant thing.

We are continuing to look at the data, analyze the data, we have some initiatives for more small business initiatives that I think will work well.

I mentioned earlier that the UTM-1, 130, for example, product that we launched at the beginning of the year is a great success and like caused our low to mid end products and unit number to grow very, very significantly.

So that means that there was an important need for a product at this price range, and I think it's great that we were able to really see doubling the unit in, let's say, sub $7,000 appliances, based on best product alone.

So nothing major, but a lot of small, good indications.

Got it.

Thank you and good luck.

Thanks.

Thank you.

Thank you.

Our next question's coming from Jeff Evenson of Sanford C.

Bernstein.

Thanks.

Wondering if you could give us a little bit of color on how you guys evaluate the pipeline and the close rates, then formulate your quarterly guidance?

There's many different internal processes to evaluate.

It starts from collecting the sales pipeline from every region, goes through multiple levels of checks and estimates by the regional VPs, by the financial group and so on.

Keep in mind that our business is very, very distributed.

Unlike major enterprise companies that have small number of very large deals, we don't have any deal -- if you look at the quarter, I don't know if we have a single deal that's more than 1% of the quarter, and number of orders we take for the quarter is north of 20,000, so it's very, very distributive.

That's -- by the way it also is good in many cases because that means that the run rate and the diversification of the business provides a lot of stability.

We did see, and I think Tal indicated, that for this quarter we had 29% of deals over $1 million --

29 deals.

Yes, 29 deals over $1 million compared to 22 a year ago, so that always provides some good up side, but it's clearly it not the majority of business.

The majority of the business is, let's say, deals of $50,000 roughly, not hundreds of thousands and not millions of dollars.

But a good process for that we're doing it multiple times a quarter, and still at the end I want to be clear, I think we're finishing two years of outperforming every quarter, of seeing the sales team really living up to their numbers and doing great job, but still predicting the future is not something that;'s highly reliable or that I can sit here and say that this number is locked in.

I'm entering the year optimistic, so I hope I'm wrong, that the numbers will be higher than what I'm predicting, but the other direction is also a possibility.

Are the parameters you're using to translate the sales force and regional comments on the pipeline into a forecast different than you were using a year ago given that maybe the economy is a little bit more certain now?

No, is not -- there is no big change to.

That keep in mind, by the way, that a big part of the business is annuity.

It's called software contracts, so we know what they are, and we know what our average.

We're double-checking ourselves, so we have the exact analytical model, we have the exact list of all the contracts and what the historical renewal rate on one hand, and then we have the sales forecast, which they give their perspective, (inaudible) we compare the two and that represents more than 60% of the business.

And then we have new deals, but they're coming, and again, there is a mix between run rate business coming from the channel to major deals that are more focused and more, like you are saying, specific parts -- I know as specific deals -- and there is a good mix of that.

But I don't know that we are -- that we've changed the methodology in the last few years.

We are improving it, we are making it more accurate, we are seeing changes, like the move to appliances changes the renewal rate, because customers would buy a new product instead of renewing an old contract.

But the methodology in general is the same.

Tal, you mentioned that your diluted share count is up as the share price goes up, could you give us any rules of thumb on how to think about the increase in diluted shares with the change in the share price?

I think we've seen a significant change in the share price, I'll say this type of -- a good problem in a sense and we've seen that it moved up from average of $212.5 million to $213.5 million, so that was approximately one million shares increase on average for an increase in the share price that you've seen.

So I think looking forward it depends what your expectations, but you can assume an increase of a few hundred thousands each 10%.

So it's fairly linear in the range that we're in right now?

It should be.

When you think of the calculation it's basically the effect of all the outstanding options and RSUs, so there should be some linearity there.

Thank you.

By the way, keep in mind that if you look at the last five years at Check Point, the number of shares has decreased dramatically, and the dilution that we have is actually -- there's no dilution.

Every year we are buying much more shares than we are allocating new options and the new RSUs to employees the number of shares is drastically increasing.

The source of dilution for new options and new shares we issue to employees is less than 1% annually and the number of shares we buy back is much, much higher than that.

So keep that in mind, but now because of the jump in the share price we've seen (inaudible), but the five-year trend is very positive based on what we've seen so far.

Actually, not many years ago we had more than 250 million shares, now we're talking about 213 million shares.

It's a pretty significant decrease in number of shares outstanding.

And our proxy, by the way, for allocating stock options and RSUs have changed from the late 1990s when the dilution was pretty high for the end of the 2000 when, like I said, the dilution is less than 1% annually.

I would just summarize it in a way that if you assume in the models that the share price will increase you should assume some increase in the shares.

Thank you.

Thank you.

We'll take our next question coming from Phil Winslow of Credit Suisse.

Hi, guys, great quarter.

Gil, I was wondering if you'd just give me a sense for maybe the age of the of what you think the, call it the firewall hardware installed base is out there for Check Point appliances, if we actually saw a lengthening of that during 2009, if you actually think we can see some increased replacement or refresh of that in 2010?

And then, Tal, what should we be thinking about a tax rate going forward?

Thanks.

The upgrade cycle, first, this year for the first time we've started to fully participate in the upgrade cycle and that's the good news on that, and I think in two years we will be full into the upgrade cycle.

Three years ago we didn't almost see the upgrade cycle in our new product sales because we sold almost no appliances.

2008 it started, 2009 we were, let's say, atop of it, maybe 2010, 2011 we'll start seeing the full upgrade cycle impact our business.

Whether that's long term or short term, I don't know.

I haven't measured it recently and I think we're seeing all types of projects from all parts of the world.

Some are growing infrastructure, some we are replacing competitors, some are just upgrades, there's all kinds.

We have thousands of new customers every year, keep that in mind, but we're talking a lot about upgrades and selling to existing customers.

It's not surprise because we have a huge install base and I think we have a huge market share.

But we have a lot of pushing to getting into new customers and we are adding roughly a couple thousand new customers every single quarter.

Those customers usually join with small deals and a year later they start to produce larger deals.

The way we work is usually we don't -- we sell the customer an initial deal, a few products, and a year later they come and they increase the install base.

So I think we're seeing good mix between existing and new business and annuity and upgrades and so on.

I would just add that, as we entered the appliance arena in 2007, 2008, increased it in 2009 with additional models that as we sell each year more appliances then our opportunity in the refresh cycle going forward when it will start will increase through the years.

And as to the tax rate to your question, it was 19% this year, it's expected to be similar next year, and as I always say, it can tweak 1% up or 1% down, depends on the quarter and then the growth rate, but the assumption for now is in the same area.

Great, thanks, guys.

Thank you.

Our next question's coming from Todd Raker of Deutsche Bank.

Hey, guys, nice quarter.

Two questions for you.

First of all, could you give us some sense on the Nokia side, what percentage of the Nokia install base has converted to Check Point and where you stand on the Nokia opportunity?

Let's first understand what's converted to Check Point.

All the Nokia customers were Check Point customers were Check Point customers before and they --.

Yes, upgraded their -- maybe converted is the wrong question, but up sold.

I think you guys have commented about 60,000 installed units in that space.

I don't have the exact number that we sell but that business continues to sell.

I think what we are now a little bit more openings.

Before there was a question to the customer every year, I need to buy a new appliance, what do I buy, a Nokia IP appliance or a Check Point UTM-1 or a Power-1, that's not a question any more.

Today the customers can choose whatever they want.

By the way, doesn't necessarily mean that they buy UTM-1 or Power-1, there's many customers that before got the great deal from Check Point on Power-1 and UTM-1, but now they can get the IP Series appliance that was previously Nokia from Check Point and they are happily buying that, so it doesn't necessarily increase in one or the other product.

We did see a big increase in the ASP for the IP Series, the previously Nokia appliances, and that's mainly in the results, but now with every new appliance we also ship new software and new Software Blade.

So on the one hand we are giving customers very good trade-in deals that before they couldn't get based on their old hardware and on their old software.

On the other hand, with every deal we also give them new software, but before in many cases we didn't see because Nokia didn't have much motivation to sell them -- not to sell them.

Nokia didn't sell the software so Nokia didn't have any motivation to involve the software.

So overall from the IP Series we've seen a very nice ASP increase as the result of the shift to Check Point.

Okay.

And second question, for Tal here, if I look at that time interest income line, continues to decline, which is clearly driven by the interest rate environment, but your cash balance continues to go up.

Two questions.

Should we continue to model interest income coming down on a quarterly basis for 2010, and what point in time do you guys start to really step up the stock buyback program?

You've got over $1.8 billion in cash here, you're still accumulating cash on a quarterly basis, what do you guys think in terms of the appropriate cash balance to continue going forward?

I'll take first part first.

What happens in the portfolio is it's all invested in the notes that mature over time; some of them over a year, some of them over two years, some of them over three years.

Then as we saw the decline in the interest rate around the world, two years ago, a year ago, and so on, then you see the affect actually coming into the portfolio, or into the income line -- the financial income line only over a period of time.

So I would say it can continue to reduce slightly, and if we will see toward -- through the year an increase in the interest then we will start to see increases.

So I would say stable, slightly down.

Okay.

And on the cash balance side is there anything specific to your domicile in Israel that prevents you guys from buying stock more aggressively?

So in terms of the stock buyback, first, we are buying stock today at a pretty high rate and as you saw in what we've budgeted for next year, up to $250 million, doesn't mean that we'll use all the budget, but if we continue in the current run rate it's approximately $50 million quarterly.

We are -- because we are enjoying some tax benefits we are limited by the amount of stock buyback that we can do before there's significant tax implications.

So we are buying today at close to the maximum that we can buy without triggering more tax events (inaudible) And we're not limit by what we can buy, we're limited by the tax implication that we have.

So we are buying now at almost the full rate, and that right now the main limit (inaudible) rather than anything else.

We are planning, and I think with a good cash balance is a very, very important asset for future M&A, and I think if you heard from our strategy we want to consolidated more security solutions, we want to be the security infrastructure vendor for our customers, and I think the cash, especially given today's financial metrics on the general market, so on the cash it's a hug asset to invest, I'm not sure when and if we'll get to a very large deal, but in the past we've shown that when the right opportunity comes, we do not hesitate to do deals at hundreds of millions of dollars, maybe even more.

So I think that's a huge asset that will be there for us when we will find the right opportunity to expand the portfolio and bring something into our architecture.

Let's not forget that because that may provide us with some very, very important milestones in the future.

Okay, thanks, guys.

Thank you.

Our next question's coming from Brian Freed of Morgan Keegan.

Good morning and great quarter.

Some quick questions just on product mix.

As you look at your Software Blade architecture can you comment on which blades are seeing the best penetration currently and which ones you're most optimistic about on a go forward basis?

And then secondarily, can you give us a little bit of color in terms of what sort of uptake you're seeing of your Software Blade architecture on to virtual machines?

First, we are bundling a bunch of blades we ever new system, so most of the blades are there because somebody is buying them and every new product and every new appliance come with a collection of blades.

It can be three blades, five blades, seven blades, we have different models, each coming with different set of blades.

One of the blades which we are pushing a lot is the IPS blade, which was introduced in 2009.

I think that has a chance to revolutionize or -- not revolutionize the world but change an industry.

Because IPS, which will become from an auxiliary systems, which in many cases weren't used in prevent mode, which were extremely expensive and sort of a separate market in security than the gate way or the firewall market, I think we stand for a very, very good chance to consolidate that and make it part of the general gateway and bring ITS to every gateway.

By the way, today we bundle that blade -- because we so much believe in that we bundle the blade with every new system -- almost every new system, and the success will actually be determined next year when we'll sell the renewal for that blade, because that's an annuity blade that the customer has to pay for every year.

So I think the real test for that will be in 2010 when customers will actually have to renew the blades.

This blade, by the way, tremendous value.

Maybe I'll give one example.

We've seen a lot of coverage in the press in the last few weeks about the attacks in China and the (inaudible) attacks that happened.

There's been very serious vulnerabilities that a few infrastructure companies have fixed in the last few months.

The interesting things about those attacks, first, they weren't simple attacks.

They weren't attacks that involve s simple -- like a one-step operation.

You go to one place, you get something, and that's it.

They were multistep operation.

You have to go to one place and get infected with some vulnerability, go to another place and this vulnerability starts doing the bad things that happened there.

They attacked a lot of companies, not just Google and not just in China.

They attacked many, many companies from many different industries.

And the reason I'm putting that out, because even though the fixes for these -- for some of it have started getting into the market in the last few weeks, customers that have used our IPS blade and our recommended consolidation were protected against that before these attacks started happening.

So our IPS has the, what we call zero day protection against -- that preemptive protection against those attacks.

Even though they are multistep, complicated and so on and customers that were using that were fully protected.

Again, in the Check Point Software Blade model that's not a complicated new infrastructure, that's not investment of hundreds of thousand, that's one click of activate reset of protection and all your gateways and all your infrastructure would have been protected, and that's very, very important to understand.

And that's why I do believe in the IPS blade.

And, of course, there's many, many more blades from management blades, like Workflow Management for security management, and many, many others that I think every customer, or almost every customer would want.

And because of the attractiveness of the blade pricing -- the blade is usually priced between $1,500 to $4,000, so it's a very easy decision to do in terms of purchasing.

Great, and on the virtual machine side of things?

I think we have a lot of solutions for virtualization environments, from (inaudible) solution to our VE edition of product that's running VMware environment.

The VSX-1, the ones that are virtualized firewall have shown some nice success last year, especially with VSX appliances that have contributed many millions of dollars to revenue.

The VE solutions that are going VMware environment, I still think it was a high potential for that, but I haven't seen the customer -- every customer has asked about it, very few people actually buy it at the end.

So I haven't seen the big take-off of V solutions, even though we are fairly unique in the marketplace with that.

And by the way, it drastically differently than our -- most of our competitors that don't have any of our -- any sort of VMware solutions, because they are hardware-based so they cannot run on any software-based platform like VMware.

Great, thanks.

Thank you.

Our next question's coming from Robert Breza of Royal Bank of Canada.

Hi.

Gil, I was wondering if you could just talk a little bit about the competitive environment, who you think you're replacing most and just how that's taking shape here as we head into 2010.

And then, Tal, as you look at the new products how much are you forecasting or building into your guidance new products and just from a timing perspective any help on the new product introductions would be great?

Thanks.

I believe that overall we are gaining share and I think we're seeing a lot of deals that we are winning, but frankly, my focus never was on beating the other people.

It was always selling on our merit, it was always selling because we are good, not because we want to (inaudible) the other competitor.

I can give you one example of deal that happened a long time ago, a huge deal, one of the largest deal which we have in our history.

We were actually pretty late in the game, we were not the vendor there before.

They had our solutions but we were not the main candidates.

We won a deal that I think overall over a few years was more than $10 million deal, and one of the reasons that the customer mentioned is not only that we had the best solution, but when we came into the account, we showed them what we can do for them.

We worked for their needs and we didn't mention the competition.

They said the two vendors that we -- that were here, they only spoke about each other and about you, they didn't speak about what they can do for us, and the fact that you came in and focused about our needs and about the superiority of the solution and not on the competition was -- made at very easy choice to buy Check Point, and that was a good example.

So I think that's our strategy overall.

We're not into fighting of it.

Competitors.

We're seeing the same competitors.

I must say that, while I think Cisco continues to be a major player I don't see them that much ag -- not aggressive, but I don't see the know-how in terms of winning sophisticated deals and I don't see them as competing on average deals.

Juniper is a little bit different.

We have a new refreshed product line and I think a refreshed view on the market.

Still I don't see that our success rate is changing because of that.

I think we can deal with it effectively.

I think the two large competitors remain Cisco and Juniper, with Juniper a little more focused on high-end account and Cisco, I think, a little more scattered around and less focused on security.

Again, that's the very high-level view of the marketplace.

Then, Tal, I was just wondering how much of the new products are forecasted or put into your guidance?

Thanks.

Actually, when you look at the guidance, you see we brought -- there's some range there in the top line -- and I assume you asked specifically about the top line -- and there's many initiatives that we have also for next year.

We take some of them into account, some of them less into account.

It depends on how quickly we think the market will adopt certain solutions.

So it's many assumptions embedded into this, so I can't give you specific answer regarding a specific initiative.

But overall I think the contribution from new products we usually model it to the low side, because every new product has a cycle -- every product that we sell has a sales cycle of three to six months and if we're talking about a product that wasn't announced yet that means that we will start seeing results third and fourth quarter, it cannot be a huge part of the forecast now.

When we're talking the about new industries, new solutions, which I think some of the things were coming up in 2010 are like this we are even a little bit more cautious.

And if we have a product which we intend to launch June, for example, most of its results will come in 2011.

So we are, I think, a little cautious of that.

We have some expectations from existing products that I think making big steps ahead, like the Endpoint, it's just not a brand-new product.

That's maybe new version or a new additions to things that continue to come to the market.

That's helpful.

Thanks, nice quarter.

Jackie, this will be our last caller -- or question right now.

Thank you.

We'll take the last question coming from Sterling Auty of JPMorgan Chase.

Yes, thanks.

Hi, guys, question for Gil.

When you talk about consolidating the different products and expanding the portfolio, how much of that is actually going to be tightly integrated on box, how much of it do you expect to develop internally versus you've had a strategy of partnering in certain technologies.

How are you going to balance to -- and then maybe, Tal, if you can come in on the back of that and talk about how that would impact how you invest in R&D through the year?

Well, I think a lot of is it through our R&D, but a lot of it is also aided by acquisition.

Look about the IPS blade.

Just think again, a huge potential.

A customer can buy an IPS solution for $30,000 a box and install 50 more appliances throughout the enterprise and pay millions of dollars, or they can just add an IPS solution for $1,500 to $3,000 without bringing new staff, without the need for new management.

So we'll actually -- we will see a nice up side and the customer will see a reduced cost of 80% to 90% compared to other ideas and we'll see better performance, better security, better integration, and simplifying that.

So that's a good example of how we can, I think, can change some industries.

Now the main changes, by the way, is not taking sales from today's IPS vendors.

The main change is, instead of selling IPS to 10% or 5% of the market, is selling IPS to the growth market.

So when I'm speaking about opportunity, the opportunity's not beating up an IPS vendor.

The opportunity is expanding the number of people around the world that actually use that technology because it's became simple, affordable, and secure.

And that's the focus of Check Point from day one, was with the first firewall.

We made the firewall widely available, that was the big change that we made to market, and that's still the focus now.

Again, that's based on some technology acquisition, not just internal development.

In terms of our investment, if we look at our budget increases next year, the addressed investment are in sales and R&D.

There is no other -- the other things that may change as a result of sales is the cost of goods, but pretty much all of the new investments are in R&D and sales, and we believe that we can invest more in sales because that produced very good results and we believe that we also need to develop and shift to new product and we're doing both.

So that's are all the things that we are doing and in the future I think we'll do more of all of that.

Thank you, guys.

That's it for the call, we'll be looking forward to speaking with you on the coming day regarding your question off-line.

Thank you, and have a great day.

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