Check Point Software Technologies Ltd (CHKP) 2010 Q3 法說會逐字稿

Greetings, and welcome to Check Point Software 3rd quarter 2010 earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

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

Meinzter, Head of Global Investor Relations, for Check Point Software Technology.

Thank you, Mr.

Meinzter, you may begin.

Thank you, Rob.

Good morning, everyone.

I'd like to thank all of you for joining us today to discuss Check Point's record financial results, for the third quarter of 2010.

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

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 Check Point.com.

For your convenience, the conference call replay will be available through October 27.

If you would like to reach us after the call, please contact Investor Relations at +1-650-628-2040.

Before we begin with management's presentation, I'd 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 demand for our security products.

Our expectations regarding the introduction of new products, and the success of those products.

And our expectations regarding our business and financial outlook for the fourth 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 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 discussed in Check Point's annual report, on Form 20F for the year ended December 31, 2009.

Which is on file, with the Securities and Exchange Commission.

As a reminder, Check Point assumes no obligation to update its forward-looking statements.

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 GAAP presentation, our presentation of non-GAAP information.

Now, I'd like to turn the call over to Tal Payne, Check Point's Chief Financial Officer, for a review of the financial results.

Thank you, Kip, and hello, everyone.

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

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

Our results exceeded the high-end of our projections, as we continue to demonstrate solid growth across all regions.

Our revenues for the third quarter increased by 17%, over the same period in 2009.

While our non-GAAP earnings-per-share were at $0.63, representing 21% growth over the third quarter of 2009.

Before I proceed further into the numbers, let me remind you that our third quarter GAAP financial results include non-cash equity-based compensation charges, amortizations of acquired intangible assets, restructuring and other acquisition-related charges, and the related tax effects.

Keep in mind that non-GAAP information is presented, excluding these items.

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

Third quarter revenues were at all-time records of $273.2 million, an increase of 17%.

Compared to $233.6 million in the same period a year ago.

This growth was driven by exceptionally strong product sales.

Product and license revenues were $106.4 million, representing a 22% increase, over the same period last year.

The growth came from [our main] network security product line, including the [Power One], UTM-1, and Smart-1.

Our software and updates, maintenance and service revenues, reached $166.8 million this quarter.

A 14% increase, year-over-year.

The first revenues as of September 30, 2010, were $396.3 million.

An increase of $36.2 million, or 10%, over September 30, 2009.

Our trend over the past few years is from-to move from, to more concentrated contract renewals in the fourth quarter, by unifying each customer renewal into one large contract.

We expect Q4 to show significant increase in the [first] revenues, just like we saw last year.

We had growth in revenues across all geographies, with the Americas and Asia Pacific leading the growth.

This is the fifth consecutive quarter, in which the Americas are leading our growth.

It is a good sign for the strength of our business in the US.

Revenue distribution by geography for the quarter was as follows.

America contributed 44% of revenues, Europe contributed 38% of revenues.

In Asia-Pacific and Japan, Middle East and Africa region contributed the remaining 18%.

From a deal side and quantity perspective this quarter, transactions greater than $50,000 accounted for [67%] of the total order value.

Compared to 54% in the same period a year ago.

Million-dollar customers have also grown nicely this quarter, with deal volume growing by 10%, compared to Q3 last year.

Product value in these deals was even more impressive, with 36% growth.

From an operating perspective, reported great results.

Our non-GAAP operating income was $156.9 million this quarter, an increase of 23%, compared to the same period in 2009.

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

Non-GAAP operating margin this quarter was 57%, an increase from 55% in the same period last year, and the previous quarter.

GAAP net income for the third quarter of 2010 was $114.5 million, or $0.54 per diluted share.

Up from $91.5 million, or $0.43 per diluted share, in the same period a year ago.

We're presenting an increase of 26% year-over-year.

Non-GAAP net income for the quarter was $132.6 million, or $0.63 per diluted share.

Up from $109.5 million, or $0.52 per diluted share a year ago.

Earnings per share exceeded the high-end of our guidance, representing 21% growth year-over-year.

Primarily as a result of our stock line performance.

The number of shares using computing diluted earnings per share, was 211.6 million shares.

Going forward, given the increase in the stock price at the current level, these numbers are expected to be around 213 million to 214 million shares in Q4 of 2010.

Our cash flow for operations this quarter was $144.6 million.

An increase of 15%, from $126 million in the third quarter a year ago.

This was mainly as a result of strong collection, as reflected in our DSOs.

Which was 59 days this quarter, compared to 74 days in the same period last year.

During the quarter, we purchased approximately 1.44 million shares, for the total cost of $50 million, as part of our share repurchase program.

Finally, our cash balance at the end of the quarter was $2.256 billion, compared to $1.736 billion, as of September 30 last year.

Over the past 12 months, we have generated $520 million net.

After two small acquisitions, and approximately $200 million in stock purchases.

Now let's turn the call over to Gil, for his insights on the third quarter.

Thank you, Tal, and thank you, everyone, for joining us on the call today.

The third quarter was quite an exceptional quarter.

We delivered all-time high record results for the quarter, which exceeded both our top-end bottom line projections, while producing operating margins of 57%.

This was the second consecutive quarter, in which we realized 20% plus organic growth in product revenue.

Which reflects stronger demand across our network security products during the quarter.

I'm also pleased to see that more and more customers are drawn by our [Software Blade platform], and recognize the value that we're working hard to provide.

Our numbers only show that people [throughout] see the potential of selling additional new Blades.

Our IPS Blade is doing quite, and would continue to have an impact on the revenue.

Keep in mind that it's revenues are part of the services line, and are amortized over the next year.

The Software Blade longterm strategic vision is starting to catch up with our customer.

During the quarter, we announced and delivered several new Software Blades, further expanding our offerings.

These include the application Control Blade, which is actually expected to ship in Q4, that secured access to Web tool applications.

For a unique combination of the technology user awareness, and grown application controls from the world's largest application classification database.

To check for (inaudible) of over 50,000 web tool rechecks, and more than 4,500 internet applications.

We also introduced our [Security Gates virtual edition] software Blade review safe integration.

That provides customers with one-click security protection, for private and public clouds.

In addition, we introduced multi-domain management software Blades that allow businesses of all sizes to simplify security management.

By segmenting security into virtual domains based on location, business unit or security function.

And, we keep innovating with more Software Blades.

For example, this quarter, actually today, we are going to release another exciting Blade.

Our mobile Blade, which will enable our customers to get a new level of connectivity and security from their iPhone's.

Customers will get one-click secure access to their corporate portal, and full and secure integration with e-mail contacts and calendars.

The new iPhone mobile Blade app is available now, and so is the Gateway [Software] Blade.

For financial projections-our year-to-date results provided us with some good reasons to increase our fourth-quarter projections.

So we are increasing our projection, as we expect revenues in the range of $290 million to $312 million.

Non-GAAP earnings-per-share is expected to be between $0.65 to $0.70.

GAAP-based EPS is expected to be approximately $0.09 less than that.

For the full year, we are translating to revenues in the range of $1.069 billion to $1.091 billion.

With non-GAAP earnings-per-share between $2.38 to $2.43.

GAAP-based EPS again is expected to be approximately $0.36 less than that.

I'm glad to have you all on the call.

And I'm even more pleased to raise our guidance again for the year.

We're looking forward to a great fourth quarter.

With that, I'd like to open the call for your questions.

(Operator Instructions) Our first question is from the line of Shaul Eyal with Oppenheimer & Co.

Please proceed with your questions.

Thank you, good afternoon.

Congrats on the good execution and continued execution I should add.

Two quick questions on my end.

What is the current state of affairs in Europe, maybe you can provide us with some more color about specific countries, and the second question is, Gil, what are you seeing in terms of market share gains?

Can you kind of specify any particular vendor that you think you could be grabbing or be getting some shares?

First from a geographical standpoint, we'd mentioned that the US continues to be very strong again in the fifth quarter in a row, which is quite impressive.

Europe was fine - we haven't seen much impact on macro economic effects on the Euro.

Some countries, we had better results, some countries (inaudible) good results, but at least as far as we can tell which was related to internal issues that we had, it doesn't really correlate to the macro economic conditions that some might expect in Europe.

So I think although Europe is stable, we'll see next quarter how it continues.

Asia-Pacific, by the way, this quarter was very strong and we have a market trend which we are increasing our revenue, that continues with more potential, again, there are countries in Asia that we have much more potential but overall the numbers are actually very very good.

So is Latin America by the way for this quarter.

Overall everything is good and a few countries which we can improve but as far as I can tell related only to more our internal issues than anything I can identify.

Relating to market share I am trying to focus to bringing the right thing for the customer and developing the right products and ultimately trying to measure up against the competition.

I do have reason to believe we are gaining market share nicely.

And I guess its from several of our competitors and I think we have a lot of new products and new exciting things coming up next year that will accelerate even more.

But again, my focus remains on how we do the right thing for the customer, not measuring a one point or two point gain in market share in the quarter.

Got it.

How many Blade did you have by the end of the quarter.

Around 33?

Or is it higher numbered now?

I think it is higher number but I don't have it in my mind.

It's Metric Blade or (inaudible) or Management, I think the total combination is around 40, but I would have to check it but I'm not sure.

Thank you very much, good luck, good quarter.

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

Thanks, great quarter again.

When you think about your cash balance, obviously you have more cash in some countries.

How are you thinking about either accelerating a buyback, obviously that increases the tax rate, or maybe acquisitions, for a small acquisition, what areas?

Can you talk about that, obviously it is a good problem to have and how you are thinking about it?

Thanks.

Let's talk a little bit about the buyback fixation and how these things change because they are changing.

I don't think our cash balance is actually very good in the sense that it enables us to think more and more about bigger and bigger acquisitions.

I'm not trying to hint that we want to do a big one now.

I think the cash balance that we have is good and we can do it and accretive deal at most sizes available for the security market.

It think that is a very good sign if we find that one of the companies in the marketplace is the right target.

There is no hint here, just a look at the macro level in the securities companies compared to our cash balance.

As we always said the main use for our cash is planned for acquisitions and buyback and working capital.

I would like to say one word about buyback historically, and still the cast today, was that the limit on the amount between the buyback or the dividend, that is not subject to taxes.

There is no limit, we can distribute as much as we like, but if we shoot for more than a certain amount, it would be subject to taxes.

The good news is that the tax authorities in Israel and the legal situation right now, it looks like it is going to be changed, there is a proposition to change it, which means that the consideration whether to distribute or not will not have any more, if it will pass and everything will go according to the plan, there will not have more considerations on the tax effect, now we will be open to make own decisions.

It is still the main decisions and it remains acquisition buybacks versus the level of pressure in the company.

So tax changes look like they are going ahead, but we will have to continue following up closely to see if it will changed.

Maybe one more addition, there is another plan also to reduce the tax rate in Israel in general.

So I think when it comes to taxes, the way the government is going here, is to change it in a way that should be positive as soon as it will happen, and its expected to happen in 2012.

Thank you.

Our next question comes from the line of Phil Winslow of Credit Suisse Group.

Please proceed with your question.

Great quarter.

I was wondering if you could touch a little bit on what you have been doing, I know theres been somewhat you've been doing for a couple years, trying to ship renewals and consolidate them towards fourth quarter.

Have you seen an accelerating trend towards that over the past year?

And also a question to Gil, when you look at the Blade strategy right now, where do you think as far as penetrating install base of actually getting the architecture out there, what inning do we stand in?

Thanks.

You are right, in the last few years and it continues, it's more a concentrated country to new for the fourth quarter by unifying the customers renewals into one large contract.

It benefits us and it benefits the customer so it is the same phenomenon we have seen before.

You can see that the short-term revenues increasing 12% and you can see that the reduction versus the previous quarter is a similar percentage, obviously not in dollars because our base is increasing, but in percentage is similar to what you have seen in averages in the last five years, between 2%, 3% to 6%.

So it is very much in line with our expectations.

In terms of the software Blade, I think we are seeing at first most of the new products are sold with our R70 in the software Blade.

We are seeing a continual change in continual shift of existing customers to upgrade their software to our software Blade version.

To date, its a small percentage.

It's the tip of the iceberg in terms of what the benefits are.

The good news is that I think we are hearing more and more from customers that they find it appealing, that the number and functionality, they seem to like the multi-Blade which we are launching today that has a really good feeling and every company has remote users, every company wants to connect multi-devices to do exact work.

It can have and should have a good impact on people, motivation to operate.

Today we are talking about many many tens of thousands of customers that are already on the software Blade version and I think that 2011 can be a very important year for much bigger conversion.

Great, thanks.

Thank you.

Our next question from the line of Gregg Moskowitz with Cowen & Co.

Thank you very much.

Tal, maybe just a quick housekeeping question.

I know you reported that your volume increased for large deals, just wanted to confirm, is that a total contract value number that you're talking about and if so, I was wondering if you could also tell me how many deals over $1 million were signed in the quarter?

Sure, I was talking about the deals I knew, thats correct, the number of transactions were 19 customers with total transactions over $1 million.

Okay, and then in terms of the security appliance as a percentage of products revenues this quarter?

I think it is a little bit over 75%.

Right now it is pretty much (inaudible) and that means that with all the growth that we're seeing is not a shift in product mix, its selling more product, it's getting slightly higher (inaudible) service product, so it is all very very nice growth that we're seeing.

Okay and then lastly for Gil, how did Endpoint do in the quarter and wondering, do you have an update on the potential timing of the new Endpoint suite that you're planning on releasing?

Endpoint was relatively stable this quarter.

I think there was a lot of expectations for the new version like you mentioned, and it is still expected to ship this quarter, and thats a very revolutionary approach to management with unified management with a new (inaudible) for security management of Endpoint checking is way way ahead of everything else in the marketplace.

Still between that availability and having a more significant effect on our growth rate of revenue value which will take a long time.

We are still a small vendor in that space and I think it will lead to a show of a lot of proof points thanks to the superiority of our management and client technology.

Okay that is helpful thank you very much.

Thank you.

Our next question Michael Turits with Raymond James, please proceed.

On software Blades, two questions.

One, can you put in order, you mentioned IPS, can you put in order the Blades that are selling in terms of how much they are being pushed through and then I have a follow-up?

In front of me right now I have two types of Blades.

One we call the annuity Blade, that the customers pay every year.

And theres sort of Blade with our parts.

With our product Blade the customer pays forever.

In terms of the annuity Blades, this includes solution exemption, antivirus, filter link, anti-spam, things like that, the IPS Blade are approximately 75% of the Blade.

And the (inaudible) are 20% to 25% of the Blade.

We have seen very nice growth from all of them.

In the annuity Blade, year-over-year, was about 29%.

The IPS Blade itself is closer to a 40% or 50%.

We have seen very healthy growth in the Blade.

And by the way, many of these Blades, the good version or the version that we are (inaudible) around we still expect it to come later this year or next year.

Thank you.

Approximately where are Blade now in terms of percentage of your services revenue?

If I look at the services number, about how big of a piece is that is accounted for Blades and how much was it say a year ago?

Is not a very big volume because we have very very big software subscription contracted and the (inaudible) contracted for most of that, it is significant but it's still very small and we don't break the number out.

Okay, great, thanks very much guys.

Thank you.

Our next question is from the line of Robert Breza of RBC Capital Markets.

Please proceed with your question.

Hi, good morning.

Gil, I was wondering if you can give us an update on how the overall transition for the Nokia customer base you?

And congrats, with the anniversary date and an update on what you're seeing from a customer conversion perspective, it would be helpful?

Thanks.

I think very very good.

For now, we are already completely integrated and I don't think there was any issues in the marketplace.

Customers are very very confident about our ability to deliver, about our ability to support.

I think integration was very quick, it is not that we went through last year, we haven't changed much, but now we have already completed two quarters.

So we have quarter on quarter comparison, for a financial standpoint, and I only hear good things from customers.

I think what customers are expecting now is what we count in 2011 and mainly 2012 is unifying the platforms.

The three-point customers are very happy, we are becoming more and more unified and potentially unified customers which prefer to purchase only Nokia appliances are more open to get the Check Point (inaudible) and UTM appliances, which is also very good.

Again we hear a lot of expectation to the new models that may come to market in late 2011 and 2012 which will actually unify the two platforms and will be single platform for Check Point's.

Thank you, great quarter.

Thank you.

Our next question from the line of Philip Reuppel with Wells Fargo Securities, please proceed with your question.

Great, thank you very much.

Gil you mentioned the migration the new Blade chassis, the R70 will be important as we move into 2011.

Are you seeing any acceleration in that or is that still happening at a measured pace?

Secondly, the margin improvement that we saw the quarter, was there anything specific or more beneficial this quarter than you expected or was it really the greater revenue realization?

Thanks.

That easy part of the margin, is the revenue.

The expenses are not necessarily working in our favor.

(inaudible) is very little effect but it's still not in our favor so the main line is simply more revenue and product revenue than we expected.

As far as migration to R70, I think it is going very very well.

I think customers are happy with the product.

I think the only thing that holds us back is simply the customers are not anxious to upgrade their gateways.

Actually it is a good news because it means that the first we have a lot more potential moving forward and second, it means that we are very happy with what we have two date.

Great.

From a customer perspective, is the drive there to move more towards the suite of products, the UTM-1 solution, or is it really a desire to upgrade the point products initially and you see the follow on sales later on?

I think it depends on how we package it.

Many customers it depends.

The high-end, the customers are trying to keep the securities solutions doing small numbers of functions and doing it very very well.

Software Blade Architecture allows them to think about keeping a more open way to see that we have an architecture thats more mix and match than they had before.

The customer still, at the data center and high-end, are still focused on the small number of functions per device.

Small and mid-sized enterprises, and again, small and mid-sized enterprises are not necessarily tiny companies, it can be companies with thousands of people (inaudible).

I see a much bigger shift into using all the functionalities of the UTM-1 and Software Blade Architecture.

Things like messaging security, anti-virus, IPS, and so on.

So that goes very well, and on the high-end there is more shift towards using the IPS, because the IPS is the message that they're getting more and more what they need and that we can supply at a high quality and high speed.

.

Great.

That is very helpful.

Thanks much.

Thank you.

Our next question Sarah Friar with Goldman Sachs.

Please proceed with your question.

Thanks for taking my question Gil, can I ask a questions on the Endpoint, what you see going on there as we see changes like desktop virtualization begin to gain momentum?

And what does that mean in terms of change in footprint of Check Point's.

Does it move more and more stuff back towards the data center again making the network more important or do you still think that there is a role for security on the Endpoint?

I think the desktop virtualization is an important trend but we have much more virtualization much more endpoint.

The main shift I am starting to see in Endpoint, yes our software it is still important but we've asked our customers about their priorities next year and most of them are using products from more than three vendors for security.

Yes, we would like to reduce that number of vendors and they are interested in what we are doing, but the biggest shift that I've seen is actually on something else.

It's the move to mobility and we have seen a tremendous shift in the last three years to making mobile devices like iPhone and iPod and other competitors gain momentum in the enterprise state.

We are starting to see that as a real trend.

The ability to access the metric from the mobile device existed for 10 years, the real day to day use of that is accelerating with these kinds of open or semi-open devices in the last year or two.

We are seeing more and more interest in that.

If there if there's one thing that in the next five years can change more drastically the shift of platform, it is that trend.

Got it.

That is very helpful.

Tal, can I follow up quickly on the cost side of things.

I understand the leverage that you get when you get the outperformance of the top line which is terrific, but as you think about particularly sales and marketing, since it's the biggest OpEx line, you assume that for December and as we look into next year that as a percentage of revenue it returns to a more normalized level around 19% to 20% rather than the 18% it fell to in this quarter?

I would just say typically we have higher margins in second quarter if you look throughout history.

Second quarter has higher marketing expenses and events and so on.

So you have less events in third quarter so that why you receive lower marketing expenses.

And typically, as well, many employees take vacations so you have less compensation expenses in that quarter, so that's part of the explanation for the margin.

I would assume the same trends in the future as well.

Most of the market, fourth quarter has a lot more marketing expenses based on year end commissions and so on.

First quarter, second quarter we have a lot more conferences and events.

I think our focus has remained on driving the topline/bottom line, we are not trying to improve on the margin itself.

Right.

Thank you very much.

Thank you.

Our next question from the line of Brent Thill with UBS.

Please proceed with your question.

Thanks.

The Blades seem to have a positive impact on ASPs and I am curious in terms of how much more running room you think you have on ASPs?

Secondly, a number of software companies have moved to enterprise license accretive model as they become a platform, are you seeing more customers requesting an enterprise license agreement where they can consolidate all their spend and creating some specialized programs through enterprise license agreements with a customer base?

Yes and no.

Yes, I think the relationship has greatly improved with our large customers in the sense that we are able to look at them not just as a single product purchases but as much bigger with the total strategy of the total account.

That is reflective both in things like annuity, the fact that customers renew their contracts once a year or renew a few products, a few accounts every quarter.

It is also reflective in the big purchase of a few products.

We are not entering into many many user agreements with the customers trying to blanket agreement to buy too many products.

We (inaudible) a few years ago, we are still open to doing that in the end, I think what we sell to customers is usually very tangible.

They buy the project, the project and the product that they need at the time they need it and there is hardly ever any kind of huge contract they are not reflecting the overall installation and uses (inaudible) of our software in an ongoing basis.

Thank you.

Our next question is from the line of Keith Weiss with Morgan Stanley.

Please proceed with your question.

Thank you, guys.

Also, very nice quarter.

I was wondering if you could talk to us a little bit about the linearity you saw in the quarter, how revenues played out or how sales played out throughout the quarter?

And give us visibility into your pipeline heading into fourth quarter and what was most promising in that pipeline?

The quarter was very backend loaded like most good quarters.

Slightly less backend loaded than the previous quarter but still its not two or three more points less than in the last days of a strategic shift.

It is a positive shift when it happens but its not a great change in things in terms of planning our business.

I think we are starting to move forward with a good pipeline of projects and a good pipeline of products that we are shipping a good number of contracts.

I want to be cautious because we had a very good run up in the last few quarters but I want to be careful about the fourth quarter, but from all outward indications I am getting it is going to be a great quarter.

We have increased out guidance and we have good forecast from our field.

We expect to ship more products than we have ever done in our history.

Excellent.

If I can add a follow-up.

From the mid-point of your guidance, it looks like you expect to be able to maintain margins close to that 57% level.

The shekel has been gaining strength versus the US dollar, I was wondering if you could give us some visibility into how much is that expense target for the weaker US dollar?

Sure.

Remember that the year 2010, we hedged.

So whatever happens with the dollar, it had some affect for the portion that is not hedged, but the larger portion is hedged and therefor the effect is minor anyway.

It is going up or it is going down.

Looking forward, you are right that in the last few months it looks like the dollar is getting week again which means we will hedge next year which will be lower levels and higher level of expenses as we start the year.

To give you a sense of about 50% of our expenses are in local currencies and are not the dollar.

Number one is the Israeli shekel and then the euro and then many other currencies.

The dollar is getting weaker than our base of expenses in (inaudible) and if we assume a 5% change in the dollar and approximately 50% of our expenses are in local currencies than it should be in effect 5% about $10 million dollars.

Obviously, it can shift and change and it can be 12% or 8% but in general 50% is in local currencies and usually it is moving the same way versus the dollar.

Obviously we want the dollar to be strong.

Thank you guys.

Thank you.

Our next question (inaudible) with JPMorgan.

Please proceed with your question.

Please proceed with your question.

Thanks.

Two questions.

The first one is, 2010 was a very good year for you guys.

As you think about the trends that are benefited you and you think about the sustainability, as we look out to 2011, I know you're probably not ready to give a growth rate, but qualitatively how should we think about the legs that these trends have carried into 2011?

Can we see the same tailwind continue into next year?

We haven't done any modeling for next year so I am not going to give any number for the guidance.

I would say in general, that my basic assumption is that the momentum or the successes we've seen this year is not going to continue next year.

I think next year is going to be positive and I think it is going to have a lot of success but at least in terms of planning, we are not going to plan the same kind of growth rates that we have seen so far.

I think that is overall a good sign because if we would see them that would be reflected in good productivity.

Let's be honest about the main thing that we control is our expense line.

The revenue line, it depends on many outward factors that are beyond our control and that's something we have to remember.

Okay and my follow-up question.

Now that you have annualized the Nokia acquisition, some of the stuff that you have to write off for deferred revenue in the M&A accounting, in other words their maintenance specifically.

Is there any sense that those customers with the renewal rates of those customers where the deferred revenue is written up, are they coming back at a high rate and re-signing?

Are we going to get some layer on of deferred revenue from the old Nokia customers?

Is that part of the benefits that we should see in the fourth quarter?

I think it is two different questions.

The accounting treatment of contract is one thing that I think we are pretty much past for effect for the most part.

Pretty much past, second or even first quarter of this year.

What we are seeing now is a stable situation with that regard.

We haven't seen customers leaving out at higher pace, quite the contrary.

We are seeing many Nokia customers who appear very happy to stay with us.

Keep in mind if we use requisitions to rationalize many ways to actually review some of the support and subscription rates.

We wanted to use that opportunity to actually give better values to customers and I think even if it sacrifices some revenue that in the past year in close terms created a higher support or higher annuity rate or higher assessment rate, and generally, customers think we are more competitive than we were before.

If I had my guess and it's a guess today, is what we can expect all our Nokia customers instead of renewal rates, it is probably higher today than it was before with Nokia.

These are all significantly higher, from 70% to 90% is a significant change that we have seen over time.

Okay great, thank you.

Thank you.

Our next question is from Jonathan Ho with William Blair.

Please proceed with your question.

Can you give us additional color on the what that internal issues were in Europe and whether issues have been it resolved, and as a follow-up, how much demand are you seeing for application visibility solutions and do you think that could potentially drive an incremental upgrade cycle to the firewall base?

Maybe I misunderstood, we didn't have any major issues, we did have some countries that did well and some countries that did less than that.

Nothing major.

Actually the leadership of our team in Europe remain unchanged, they did a good job.

We have some countries that some people left and other countries that more people joined but nothing with turmoil in our organization.

Quite the contrary , (inaudible) it is extremely good and extremely stable.

For the most part of our world it was another situation but it is the situation now.

What was the second part of the

The second part of the question, which demand are using for application visibility solutions and do you think that this could drive an incremental upgrade to the firewall base?

Maybe one more comment about Europe.

One country that we did see some business that wasn't growing at the pace we wanted was the UK.

The UK has been our strongest country for about three or four years now, but we've seen some slow down there.

This is related to what we believe is internalization, macro economic conditions, and I think that's actually a good sign because producing the results if we have (inaudible) is plenty of upside coming back to the UK next year.

It is actually showing an even stronger part of the business.

I think if you mean the application Control Blade, there is high-level interest in that.

Actually when you use it, and I use it every day, you look at the same gateway that you have looked at before and see tremendous amount of data that you could not see before.

The exact application, and exact subapp on the Internet which people are dealing with, Facebook with people streaming media, some more use such base, some which is more security based, like users that are opening up the corporate network such as file sharing and even real hostile applications that are (inaudible) over Web connections.

I think the level of interest is high, I think still think the level of the ability and how important it seems to be proven.

It is not proven yet.

I think overall it is a very very positive impact from our customers because once you get with that customer and say I want to understand what's going on, I want to use this Blade and that triggers a whole nice set of events.

From buying the Blade itself to the latest software versions to buying new appliances that will support the (inaudible) and many people have expressed interest in the positive impact on the business.

Great, thank you.

Thank you.

Our next question comes from Walter Pritchard from Citigroup.

Please proceed with your question.

Questions, Tal, for you, one on the large uptick in annuity revenue that you saw in the quarter, the software update subscriptions and so forth, its the biggest increase that you have seen in a number of quarters here, I am wondering is that a sustainable increase and do you expect that to level the field going forward?

I am not sure I understand.

Could you repeat it?

Sure, the annuity revenue stream, the software updates and so forth was up pretty significantly in the quarter I think almost $10 million.

I am wondering what the driver of that was and do we expect that to grow on a sustained basis going forward or is there something anomalous this quarter that caused the spike there?

We expect the service revenue to continue to increase.

Not $10 million that we have seen in this quarter but obviously there'll be some shift between quarters.

Yes, strong quarter in the level of services, more than expected in that regard but we still expect to see growth.

If you look through the history as well, you can see that some quarters it was one, two, three quarters flat and then it suddenly increased to $3 million or $4 million per quarter.

In the recent year, we had $2 million or $3 million in each quarter and this quarter was very strong.

Some of it related to annuities and some can relate to specific services, of installation and so on.

Services that the customers are purchasing but it is all organic, its all normal and we do expect to see a continued growth, not in that way.

And related to head count plans going forward, I think this year, somewhat of a breakout year for the Company and you've always been very conservative in your hiring and so forth.

I am wondering, is there anything, in a year like this that would cause the company to really step up on an order of magnitude the level of investment in the business, specifically with head count?

I think we are constantly growing with the headcount.

There is no big revolution there.

We have recruited many many people, almost a 100 people to the head count.

I don't expect any sort of unusual events.

I do expect us to keep growing and keep investing in the right places.

There are a lot of places in (inaudible) that we want to invest and few places in R&D.

We have actually started this quarter, like free programs for entry-level employees.

Mainly technical positions that we are training newly graduated, not even graduate from universities into becoming expressed in technical products of Check Point's.

We are doing well and what we are trying to do is focus the people on the places that are the places that we can get the best return from them, in sales or on the technical teams.

Great, thanks a lot Gil.

Our next question comes from the line of Rob Owens with Pacific Crest.

Please proceed with your question.

Thank you very much.

Tal, can you give us the sense of what an apples to apples comparison would look like for Europe on a year-over-year basis, now that you shifted the Middle East and Africa into APEC?

Yes.

I can get it if you could just give me --

While you're looking that up, I guess a bigger picture one for Gil.

Given the consolidation we're seeing across the sector, does this have any kind of impact on pricing out there?

Are you guys changing your discipline as you are looking at acquisitions?

From a bigger picture perspective, how should we view Check Point continue to tuck-in, be a consolidator or potentially one of the companies that gets consolidated in this space?

First, I don't see that acquisition will have so much as the impact on pricing or competitiveness for us.

I think it is companies that are being acquired still need to sell and some transactions need a stronger disciplines because from startups, they are not dependent on quarter-by-quarter results.

They need to produce much higher revenues and so on and so forth.

I don't think the world needs companies that focuses purely on security and can deliver the best security software.

I think we want to be better and we want to be even better.

I think we have high expectations for ourselves in the next few years to become the bigger consolidator of security and to provide more security for our customers.

I think we will keep doing it in the focused way that we've done and so on.

And I hope within the next 10 years we will see what happens in a similar way for even a better way than the last 10 years.

Maybe just to go back to your question, in Europe, growing about 10% this quarter.

Okay, thanks, Tal, thanks guys.

Or next question is from Jeff Evenson of Sanford Bernstein.

Please proceed with your question.

This is John [Cosky] for Jeff.

Thanks for fitting me in.

The bigger picture question.

What security products do you find bigger cloud operator's are looking for?

And is security in virtual environments becoming more important both to cloud operators and to you from a revenue standpoint?

Think our revenues on the cloud in general are not extremely high, depending of course what you're calling the cloud.

We have many security providers that we are working on for 10 or 11 years.

We should call it clouds but we don't call a cloud, but it is a very vital regular Check Point product.

We provide an item that we call today the Market to Made Management software Blade.

These products continue to work well and we see a lot of interest in that.

Other than that, I think cloud services and cloud securities still in early states at least as security spending is concerned and I think I've said it before, we see a high potential but in terms of security and in terms of investment, sometimes the estimates or expectations are a little bit higher than reality.

A quick question on the Blade.

Of customers I know it is not that many, but customers who are using software Blade, how many on average do they activate?

I don't think I have a number but I think it is six or seven per customer but I need to check that.

That would be my guess.

Okay, thanks.

Thank you.

Our next question is from the line of Scott Zeller with Needham & Co.

Please proceed with your question.

Thank you.

I hope I am not repeating an earlier question but I wonder if there is color around federal spending for both the US and the content?

I have not seen too much happening over there.

Basically in line with the rest of the business.

And in the US?

I am not saying anything in particular.

Remaining the same percentage of revenue, so nothing has changed in general.

Thank you.

Thank you.

Our next question is from the line of Todd Raker with Deutsche Bank.

Please proceed with your question.

Great quarter.

One quick question I know you don't want to talk about 2011, Gil, but we you think about the dynamics of the business and we are (inaudible) the annuity, would you expect deferred revenue in the balance growth to exceed the revenue growth on the P&L?

How should we think about the dynamics around the annuity business?

I think we need to calculate that and we have not done that yet.

The general rule is that the revenue is excelled growth or the product growth is accelerating it to grow much faster than the deferred revenues and it is the product revenue is shrinking or the growth rate is declining, then the subscription rates are growing.

I think thats what you see, I think I'm very very fortunate to be in a position where our product growth rates are accelerating and therefore they are growing much much faster than the overall deferred revenue.

In terms of progress I think we'll do the calculation for next year and we will see next year.

Maybe I will add another one.

Remember the deferred, theres other factors there, remember that the deferred revenue don't include products booking, the deferred revenues does not include contracts that have not been in place.

It includes contracts that have been invoiced for the long-term that can shift between quarters but it has nothing to do with annuity rates, so it's not a one-on-one indication of anything in any quarter.

(inaudible) Having higher revenues in general, is even better.

I think having high growth revenue is the most important factor, as that means the customers are actually choosing to buy more, to do more, to extend the usage, and that is the most important factor.

Thank you.

Ladies and gentlemen we have reached the end of our allotted time.

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

Thank you all for joining us.

We will be taking calls after the call and have a great day.

Thank you.

This concludes today's teleconference you may is connect.

Thank you for your participation.